Five Point Holdings, LLC — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Five Point owns and develops master-planned communities in California, including Valencia, Candlestick and The San Francisco Shipyard, and Great Park Neighborhoods. It also holds an interest in the Gateway Commercial Campus. Financial statements are unaudited.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $12.4m | $13.1m | $25.5m | $28.1m |
| Net income (loss), consolidated | $(22.6)m | $(11.3)m | $30.1m | $(25.6)m |
| Net income (loss) attributable to Five Point | $(10.5)m | $(5.2)m | $13.3m | $(10.4)m |
| Class A basic EPS | $(0.16) | $(0.08) | $0.19 | $(0.16) |
- Revenue and operating costs: Q2 revenue fell 5.4%; first-half revenue fell 9.3%. First-half SG&A declined 10.1% to $51.8m, mainly from lower employee-related costs. Management did not provide a consolidated margin measure; no meaningful margin figure is stated in the filing.
- Unusual first-half gain: A $64.9m gain from terminating the Candlestick retail project and settling related obligations was the main driver of the swing to first-half profit. Excluding this gain, reported profit does not reflect the underlying result on a comparable basis.
- Cash flow: Cash used in operating activities was $164.7m in the first half, broadly unchanged from $164.9m a year earlier. Investing activities provided $0.7m; financing activities used $38.7m. Cash, cash equivalents and restricted cash declined $202.7m to $294.4m.
- Liquidity and debt: Cash and cash equivalents were $292.7m at June 30, down from $495.7m at year-end 2018. Notes payable, net, were $492.5m, including $500m of 7.875% senior notes due 2025; the $65.1m Macerich note was repaid in early 2019, along with approximately $11.1m accrued interest. The $125m revolver was undrawn apart from $1m of letters of credit, leaving $124m available. In July, the company issued an additional $125m of 7.875% senior notes due 2025.
- Balance sheet: Inventories were $1.81bn versus $1.70bn at December 31, 2018. Total liabilities were $968.3m; the tax receivable agreement liability was $172.6m. The filing reports $87.0m of performance bonds and a San Francisco Venture guarantee with maximum obligations of $197.8m.
Material changes versus prior comparable periods
- Q2 parent-attributable loss widened to $10.5m from $5.2m, with revenue slightly lower and equity-method results moving from $9.0m of earnings to a $2.7m loss.
- First-half parent-attributable income improved to $13.3m from a $10.4m loss, principally because of the $64.9m settlement gain. First-half revenue declined, including from the December 2018 expiration of a San Francisco management-services agreement.
- Great Park segment revenue was $213.4m for the first half versus $191.0m a year earlier, reflecting a different mix and timing of homesite sales. Q2 Great Park revenue was $43.9m versus $180.5m, reflecting fewer homesites sold in the quarter.
- The Gateway Commercial Venture recorded a first-half equity-method loss of $1.7m versus earnings of $0.5m, as higher depreciation and interest costs accompanied the campus becoming fully operational.
- The company adopted lease accounting standard ASC 842 in January 2019. It recognized $34.7m of operating lease right-of-use assets and $28.6m of lease liabilities at June 30; adoption did not materially affect earnings or cash flows.
Outlook, risks and contingencies
- Management expected to meet cash requirements for at least the next 12 months using available cash, anticipated Valencia land-sale proceeds, distributions from unconsolidated ventures and management fees. Valencia homesite deliveries were expected to begin in late 2019; Candlestick and The San Francisco Shipyard were not expected to provide significant liquidity within the next 12 months. No numerical full-year earnings or revenue guidance was provided.
- Management said it expects sufficient capital to fund planned horizontal development for several years, but noted that cost increases, plan changes or other circumstances could require additional capital. Financing may not be available on attractive terms, or at all.
- Remaining Shipyard land transfers from the U.S. Navy have been delayed by additional environmental resampling following allegations concerning a Navy contractor’s testing. Further delay or related claims could affect development plans. The company faces pending Shipyard contamination-related lawsuits and cannot predict their outcome.
- Non-settling petitioners appealed a court ruling in the company’s favor on Valencia approvals. The Valencia settlement liability was $36.5m at June 30; remaining estimated maximum monetary payments subject to the company’s guaranty were $42.8m, with the final payment due in 2026.
- Other principal risks include California real estate and economic conditions, entitlement and environmental requirements, development costs and timing, interest rates, insurance adequacy, litigation and access to capital. Management reported effective disclosure controls and no material changes in risk factors from its 2018 Form 10-K.
Important facts for investors to verify
- How first-half results look excluding the one-time $64.9m settlement gain, and the timing and volume of future Great Park and Valencia land sales.
- Whether expected late-2019 Valencia deliveries proceed as planned and generate the cash flows management anticipates.
- The amount and timing of future Shipyard land transfers, environmental resampling findings, and potential effects on lawsuits and development schedules.
- Cash needs for development, debt service and lease obligations, including the impact of the July $125m note issuance and the availability of the revolver.
- Distributions from the Great Park Venture are subject to priority distributions to Legacy Interest holders; $355m of the stated $565m priority amount had been distributed by July 31, 2019.