Five Point Holdings, LLC — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Financial statements are unaudited. Five Point develops master-planned communities in coastal California: Newhall Ranch, The San Francisco Shipyard and Candlestick Point, and Great Park Neighborhoods. Results are not fully comparable with 2016 because the San Francisco Venture and Management Company were consolidated only from May 2, 2016.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $13.2 million | $7.2 million | $105.5 million | $11.7 million |
| Net loss | $24.3 million | $53.4 million | $47.4 million | $61.5 million |
| Net loss attributable to Five Point | $9.8 million | $18.7 million | $17.6 million | $23.8 million |
| Class A basic loss per share/unit | $0.19 | $0.50 | $0.39 | $0.65 |
| Operating cash flow | — | $1.1 million | $(55.2) million |
Revenue growth was driven mainly by a January 2017 related-party land sale in San Francisco, which generated $84.9 million in six-month revenue, and by management services. The sale produced $91.4 million in gross proceeds; $10.3 million of revenue remained deferred pending infrastructure work. Q2 revenue growth also reflected profit participation, marketing and builder fees from earlier land sales. No significant land sales closed in either Q2 comparison period.
Q2 selling, general and administrative expense fell to $27.9 million from $57.5 million, primarily because 2016 included $12.0 million of transaction-related bonuses and $20.5 million of share-based compensation. Six-month SG&A was $55.1 million versus $69.4 million; the 2017 period included more months of acquired operations. Equity-method losses from Great Park were $5.2 million for the first half. No income tax benefit was recorded in 2017, as increases in the deferred-tax valuation allowance offset the tax benefit.
Balance sheet, liquidity and financing
- At June 30, 2017, cash and cash equivalents were $514.4 million, up from $62.3 million at December 31, 2016. Total assets were $2.449 billion; inventories were $1.323 billion and the Great Park investment was $412.5 million.
- Total liabilities were $625.3 million, including $69.7 million of notes payable, $200.3 million of related-party liabilities and a $258.1 million tax receivable agreement (TRA) liability.
- Six-month cash flow was $1.1 million provided by operations, $39.9 million provided by investing activities and $411.1 million provided by financing activities. Financing included $319.7 million of net IPO proceeds and $100.0 million from Lennar’s concurrent private placement. The cash increase was principally financing-driven.
- Debt at June 30 comprised a $65.1 million floating-rate Macerich note and a settlement note with $4.5 million carrying value and $5.0 million due in April 2018. The $50 million unsecured revolving facility was undrawn. The Macerich note may become repayable if specified mall-project milestones are not met; management deemed repayment remote.
- Floating-rate debt exposure was $65.1 million; management estimated a 100-basis-point rate change would affect annual interest expense by approximately $0.7 million.
Material changes, outlook and risks
- The May 2017 IPO issued 24.15 million Class A shares at $14 per share. Together with the Lennar private placement, it substantially increased cash and contributed capital. Five Point owned approximately 58.6% of the Operating Company at quarter-end.
- Management expected available capital to fund horizontal development for several years and stated it expected to meet liquidity needs for at least the next 12 months. Development spending, land-sale timing and public reimbursements can vary; additional financing may be needed and may not be available on attractive terms.
- Newhall Ranch faced continuing environmental and land-use litigation. CDFW certified additional environmental analysis and reapproved the project in June 2017; Los Angeles County reapproved Landmark Village and Mission Village in July. Appeals remained pending. Further delays, redesign or higher development costs remain possible. A federal challenge to the Newhall Ranch permit was also pending before the Ninth Circuit.
- Performance bonds totaled $167.6 million at quarter-end. Other commitments include $102.7 million of EB-5 reimbursements, a water purchase agreement, infrastructure funding, and development and completion obligations. The Company also disclosed maximum infrastructure and park/open-space guarantees related to San Francisco projects.
- Subsequent event: In August, a subsidiary invested $106.5 million for a 75% interest in the Gateway Commercial Venture, which acquired the Broadcom Campus for approximately $443 million using about $339 million of non-recourse mortgage and mezzanine borrowing. Five Point provided limited “bad act” and specified bankruptcy/insolvency guaranties and agreed to maintain minimum net worth of $100 million and liquidity of $5 million.
- Other key risks include California real-estate and regulatory conditions, construction-cost inflation, entitlement and environmental uncertainty, water availability, natural disasters, reliance on homebuilders, related-party transactions and potential dilution or share-price volatility. No distribution on Class A shares was planned for the foreseeable future.
Investor verification priorities
- Confirm the timing, completion conditions and remaining revenue recognition for the $91.4 million San Francisco related-party land sale.
- Track Newhall Ranch litigation, permit status, development timing and any resulting cost or plan changes.
- Review the Macerich mall milestones and potential exposure to repayment of the $65.1 million note and termination fees.
- Assess the Broadcom Campus venture’s debt, occupancy and guaranty exposure, including compliance with minimum liquidity and net-worth covenants.
- Reconcile liquidity and committed development spending, and monitor the $258.1 million TRA liability and future potential payments.