Five Point Holdings, LLC — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited results; comparisons are with the corresponding 2019 periods. Five Point develops master-planned communities in California, with operations in Valencia, San Francisco, Great Park and Commercial. Its 37.5% Great Park Venture and 75% Gateway Commercial Venture are accounted for under the equity method, so venture-level results and asset-sale gains are not consolidated line by line.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $8.4 million | $12.0 million | $41.9 million | $37.5 million |
| Income (loss) before tax | $36.4 million | $(23.0) million | $(2.6) million | $8.4 million |
| Net income (loss) attributable to Five Point | $17.0 million | $(10.7) million | $(1.2) million | $2.6 million |
| Basic and diluted Class A EPS | $0.25 | $(0.16) | $(0.02) | $0.04 |
| Cash flow from operating activities | Not presented quarterly | $(115.7) million | $(251.2) million | |
| Cash flow from investing activities | Not presented quarterly | $57.1 million | $0.5 million | |
| Cash flow from financing activities | Not presented quarterly | $(18.1) million | $85.7 million |
At September 30, cash and cash equivalents were $270.6 million, down from $346.8 million at December 31, 2019; restricted cash was $1.3 million. Total assets were $3.0 billion, including $2.0 billion of inventories and $441.7 million of investments in unconsolidated entities. Notes payable, net, were $617.2 million; the debt consists of $625.0 million face value of 7.875% senior notes due 2025. The $125.0 million revolving facility was undrawn, with $124.7 million available after letters of credit. Management reported $617.2 million of consolidated net indebtedness.
Interest paid in the first nine months was $27.7 million, all capitalized to inventory. The filing does not provide a consolidated gross-margin or operating-margin measure.
Material changes and notable items
- Q3 earnings were driven by the Commercial Venture asset sale. Equity in earnings from unconsolidated entities was $52.4 million, versus a $1.8 million loss a year earlier. The Gateway Commercial Venture’s August sale of two Broadcom-leased buildings generated a $74.8 million gain; Five Point received an approximately $80.3 million distribution from the venture.
- First-nine-month equity earnings include significant offsets. Equity in earnings from unconsolidated entities was $45.4 million, up from $4.5 million. This included $84.1 million of equity earnings from Gateway Commercial, partly offset by a $38.6 million equity loss from Great Park, including a $26.9 million other-than-temporary impairment recognized in Q1.
- Great Park land sales declined sharply year over year. The venture recognized $23.1 million of land-sale revenue in the first nine months of 2020, versus $231.2 million in 2019. Five Point cites COVID-related expected delays in land sales and distributions as the main reason for the investment impairment.
- Revenue mix shifted. Nine-month consolidated revenue rose 11.8%, primarily from Valencia land sales, while management-services revenue declined. Q3 revenue fell 30.3%, mainly because Great Park management-services revenue decreased. SG&A declined 24.5% in the first nine months, primarily due to lower employee-related expenses.
- Cash use improved but remained substantial. Operating cash used declined to $115.7 million from $251.2 million. The company received $136.5 million in total distributions from Gateway Commercial; $79.0 million was classified as operating cash flow and $57.5 million as investing cash flow.
Outlook, risks and contingencies
- Management said it expects to meet cash requirements for at least the next 12 months using available cash, Valencia land-sale proceeds, distributions from unconsolidated ventures and management fees. It said it currently expects to have capital for planned horizontal development for several years, while warning that COVID-19’s duration and effects, cost increases and changing plans could require additional capital. No formal earnings or revenue guidance was provided.
- Management reported that homebuilding demand had recovered from the initial pandemic reaction, citing demand for more space and favorable mortgage conditions. Great Park builders were achieving consistent home-sale rates; Valencia’s first home sales were expected to close in the first half of 2021. Development spending would be adjusted to projected builder demand.
- COVID-19 had temporarily limited development activity and created uncertainty around consumer demand, land-sale timing, distributions, costs and asset values. Further impairment charges were identified as a risk.
- Transfer of approximately 408 acres at The San Francisco Shipyard remains subject to the U.S. Navy’s environmental transfer process. Allegations concerning a Navy contractor’s sampling work have led to retesting and delayed transfers, with potential for further delay or claims. Shipyard-related contamination lawsuits remain pending; the company said it cannot predict their outcome.
- The Valencia Landmark Village/Mission Village judgment was final in the company’s favor after the California Supreme Court declined review. The company also disclosed a settlement-related maximum potential payment of $20.9 million through 2026, performance bonds of $229.3 million and infrastructure guarantees with maximum obligations of $198.3 million.
- Related-party reimbursement obligations included $12.6 million deferred until 2025 at 6% interest. The company’s stated expected principal payments, subject to extensions, were $22.8 million for the balance of 2020, $20.5 million in 2021, $38.5 million in 2022 and $12.6 million in 2025. The tax receivable agreement liability was $173.2 million.
Investor verification points
- Separate recurring operating performance from the Gateway Commercial asset-sale gains and the Great Park impairment; confirm how much venture distributions can recur.
- Track Great Park homesite sales, distributions and the remaining priority distribution waterfall for Legacy Interest holders.
- Verify the pace and economics of Valencia sales and the expected timing of first home sales, and assess whether COVID-19 or cost changes alter development plans.
- Monitor Shipyard Navy land-transfer timing, environmental retesting and litigation developments, including potential effects on development and guarantees.
- Review cash burn, available revolver capacity and the timing and interest burden of related-party reimbursements alongside senior-note obligations.