Five Point Holdings, LLC — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Five Point develops mixed-use, master-planned communities in California, including Newhall Ranch, The San Francisco Shipyard and Candlestick Point, and Great Park Neighborhoods. The filing is unaudited. Results are subject to significant timing variation from land sales and development activity.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $15.0 million | $92.3 million |
| Net loss | $14.3 million | $23.1 million |
| Net loss attributable to Five Point | $5.2 million | $7.8 million |
| Basic loss per Class A share | $0.08 | $0.20 |
| Operating cash flow | $(71.2) million | $23.3 million |
| Cash and cash equivalents at period end | $778.2 million | $848.5 million at Dec. 31, 2017 |
At March 31, 2018, total assets were $3.0 billion, including $1.47 billion of inventories and $529.5 million invested in unconsolidated entities. Notes payable, net, were $561.1 million, including $500 million of 7.875% senior notes due 2025, a $65.1 million Macerich Note and a $5.0 million Settlement Note. Of the debt, $65.1 million bore floating rates; management estimated a 100-basis-point rate change would alter annual interest expense by about $0.7 million. The $125 million revolving credit facility was undrawn apart from $1.0 million of letters of credit, leaving $124 million available.
Gross margin is not separately presented. Total costs and expenses were $38.1 million against $15.0 million of revenue; results also included $12.5 million of other income and $3.6 million of equity-method losses. Cash, cash equivalents and restricted cash totaled $779.7 million. Operating cash use principally reflected $54.6 million invested in inventories and the absence of the prior-year San Francisco land-sale proceeds. Investing cash flow was $6.0 million, including $5.7 million of golf-course sale proceeds; financing cash use was $5.1 million, primarily share-award tax withholding.
Changes versus the prior period
- Revenue fell $77.3 million, primarily because Q1 2017 included an $83.8 million related-party San Francisco land sale. There were no land sales that closed in Q1 2018.
- Management-services revenue rose to $11.8 million from $5.5 million, chiefly reflecting the new revenue standard’s earlier recognition of estimated variable incentive compensation at Great Park.
- Reported net loss narrowed by $8.8 million. Q1 2018 included a $6.7 million gain on the golf-course sale, $1.0 million of insurance income, $2.7 million of interest income, and a $1.9 million adjustment to the tax receivable agreement payable.
- Operating cash flow moved from $23.3 million provided to $71.2 million used, largely because the prior-year period included $91.2 million of net proceeds from the San Francisco land sale.
- Five Point adopted ASC 606 on January 1, 2018 using the modified retrospective method; prior-year results were not restated. The company reported that adoption increased Q1 net income by approximately $0.9 million versus the amounts that would have been reported without adoption. Contract assets increased to $45.4 million from $39.0 million at the start of the year.
Outlook, risks and unusual items
- Management said available cash, noncore land sales and management-fee collections should meet cash requirements for at least the next 12 months, and that it expects to fund planned horizontal development for several years. Land sales at Newhall and San Francisco are not expected to provide significant liquidity within the next 12 months. Additional financing may be needed if costs rise or plans change; financing may not be available on attractive terms, or at all.
- After quarter-end, the Great Park Venture sold approximately 33 acres for $166 million in May 2018. It also made an approximately $235 million distribution to Legacy Interest holders in April; distributions to those holders totaled $355 million as of April 30, 2018, against a stated priority distribution amount of up to $565 million.
- The proposed Candlestick Point retail project remains uncertain. The Retail Project Property had not been conveyed to the Mall Venture by March 31, 2018; alternative site configurations or uses were being considered. Failure to meet certain milestones could permit Macerich to terminate the joint venture and require repayment of the $65.1 million note plus certain fees and unpaid interest, which was approximately $7.6 million at quarter-end.
- Newhall Ranch faces ongoing environmental and permitting litigation. Some petitioners settled, but challenges remained; outcomes and potential effects on project timing cannot be predicted. The company recorded a $41.8 million liability related to the Newhall settlement and disclosed maximum remaining guaranteed monetary payments of $49.8 million, with the final payment due in 2026.
- At San Francisco Shipyard, Navy environmental retesting following allegations about a contractor’s sampling could delay transfer of roughly 408 acres and future development. A May 2018 putative class action also sought to enjoin development; the company said it could not predict the outcome.
- Other exposures include $73.9 million of performance bonds, infrastructure and park/open-space guarantees, and the $152.9 million tax receivable agreement liability. Management identified real-estate markets, California regulatory and environmental matters, development costs, interest rates, litigation and capital availability as key risks. No formal earnings guidance was provided.
Important facts for investors to verify
- How much of reported management-services revenue and contract assets depends on estimates of Great Park incentive compensation and other variable consideration.
- Timing and economics of future land sales, particularly the post-quarter Great Park sale, and the Great Park Venture’s priority distributions to Legacy Interest holders.
- Progress on the Candlestick Point site plan, Mall Venture milestones, possible termination costs and the Navy’s land-transfer and retesting schedule.
- Cash burn, development spending, availability of the revolver and the adequacy of liquidity if land-sale timing or project approvals are delayed.
- Developments in Newhall and San Francisco litigation, settlement obligations, guarantees and other contingent exposures.