Five Point Holdings, LLC — 2018 Form 10-K Summary
Business and reporting period. This annual report covers the year ended December 31, 2018; fourth-quarter figures are unaudited. Five Point develops master-planned communities in California: Newhall Ranch, Candlestick Point and The San Francisco Shipyard, and Great Park Neighborhoods. It also has a 75% interest in the Gateway Commercial Venture, which owns the Five Point Gateway Campus. The company’s main revenue sources are land sales and development or property management services. Great Park and Gateway are accounted for under the equity method, so their full venture results are not consolidated.
Key financial results
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $49.0 million | $139.4 million |
| Net income (loss) | $(67.9) million | $24.2 million |
| Net income (loss) attributable to Five Point | $(34.7) million | $73.2 million |
| Basic Class A loss (earnings) per share/unit | $(0.53) | $1.33 |
| Cash from operating activities | $(343.3) million | $(58.1) million |
| Cash and cash equivalents at year-end | $495.7 million | $848.5 million |
| Notes payable, net, at year-end | $557.0 million | $560.6 million |
| Inventories at year-end | $1.696 billion | $1.426 billion |
Revenue fell 64.9%, primarily because 2017 included a $91.4 million San Francisco land sale to the Lennar-Castlelake venture. Great Park land-sale revenue also declined: the venture sold 536 homesites in 2018 for initial base-price proceeds of $166.0 million, compared with 1,007 homesites and $474.8 million gross proceeds in 2017. Higher Great Park management-services revenue, including variable incentive fees recognized under the new revenue standard, partly offset the decline.
The 2018 net loss included a $9.2 million income-tax provision, $99.0 million of selling, general and administrative expense, and a $2.2 million equity-method loss. Other income included a $6.7 million gain on the sale of the Valencia golf course and a $1.6 million insurance gain. No operating margin measure is presented in the filing.
Fourth quarter: Revenue was $7.9 million; loss before tax was $11.2 million; net loss attributable to Five Point was $14.3 million; and basic Class A loss per share was $0.22.
Liquidity, debt and cash flow
- Operating cash outflow was $343.3 million, including higher Newhall horizontal-development spending and $38.6 million of cash interest on the senior notes. The company had no significant land-sale proceeds in 2018, unlike the $91.2 million received in 2017.
- The company reported $500.0 million principal amount of 7.875% senior notes due November 2025. Notes payable, net, also included the $65.1 million Macerich note at year-end; that note was repaid after year-end in connection with termination of the Retail Project. The filing describes total indebtedness as approximately $565.0 million.
- The $125.0 million revolving credit facility was undrawn at year-end, with $124.0 million available after letters of credit. It matures in April 2020, with a conditional one-year extension option.
- Management said available cash and expected management-fee collections should fund cash needs for at least the next 12 months and that it expects sufficient capital for planned horizontal development for several years. It cautioned that additional capital may be needed, particularly for vertical development; financing may not be available on attractive terms or at all.
- The company paid no distributions on its common shares and said it did not expect to do so in the foreseeable future.
Material changes, outlook and notable items
- Revenue accounting: Five Point adopted ASC 606 on January 1, 2018 using the modified retrospective method; prior-year figures were not restated. The standard accelerated recognition of estimated variable management fees and certain land-sale consideration. Adoption increased reported 2018 net loss attributable to the company by approximately $2.9 million relative to results without adoption. The filing reported a $50.6 million closing contract-asset balance, largely for variable management-service consideration.
- Development milestones: Newhall continued infrastructure work at Mission Village and expected to begin delivering homesites to builders in late 2019. The Great Park Venture had sold 5,409 homesites by year-end, including 544 affordable homesites. Great Park distributions to legacy-interest holders totaled $355.0 million against a $565.0 million priority distribution entitlement.
- San Francisco Shipyard delays and litigation: Approximately 408 acres remain subject to Navy environmental review and transfer approval. Allegations that Navy contractor Tetra Tech misrepresented sampling results prompted further sampling, investigations and lawsuits, delaying transfers and creating development and litigation uncertainty. The company said it could adjust phasing but could not assure the delay would not materially affect plans.
- Retail Project termination: In February 2019, the company and venture partners ended plans for the Candlestick Point retail project, releasing the San Francisco Venture from certain conveyance and development obligations and allowing alternative uses. The venture repaid the $65.1 million Macerich note. The filing cites approximately $5.5 million of accrued interest in one discussion and approximately $11.1 million in another; a concurrent $5.5 million contribution by venture members is also described. The San Francisco Venture issued 436,498 Class A units to Lennar and Castlelake affiliates, alongside a company issuance of Class B shares.
- Newhall litigation: The Superior Court denied the remaining petitioners’ challenge to Mission Village and Landmark Village approvals in December 2018; judgment in favor of the County and Five Point was entered in January 2019. Other environmental and permit challenges described in the filing had largely been resolved favorably, but further challenges remain possible.
- Other commitments and risks: The filing lists $1.005 billion of contractual obligations, including senior-note principal and interest, leases, water payments, settlement obligations and EB-5 reimbursements. It also reports $73.5 million of performance bonds and up to $197.8 million of San Francisco Agency guarantees for infrastructure and park/open-space obligations. Core risks include California market concentration, entitlements and construction costs, environmental remediation and transfer delays, litigation, interest rates, homebuilder demand, leverage and access to financing.
Most important facts for investors to verify
- Whether Mission Village homesite deliveries began as expected in late 2019, and the pace and economics of subsequent land sales.
- The Navy’s resampling and FOST timetable for the remaining San Francisco Shipyard land, and any resulting claims, remediation costs or development restrictions.
- The final cash cost and accounting treatment of the Retail Project termination, including the inconsistent accrued-interest amounts disclosed in the filing and the related member contribution.
- Cash burn, development spending, future land-sale proceeds, and whether liquidity or new financing will be needed beyond management’s stated near-term expectations.
- Debt covenants, refinancing exposure, and the effect of interest-rate changes; the filing estimates a 100-basis-point rate change would affect annual interest expense by about $0.7 million on floating-rate debt.
- Assumptions behind variable Great Park management fees and contract assets, the remaining legacy-interest distributions, and payments under the tax receivable agreement. The estimated TRA termination payment was approximately $106.8 million at December 31, 2018, but is not a forecast of an actual payment.