Five Point Holdings, LLC — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Five Point develops master-planned communities in coastal California and reports four segments: Newhall, San Francisco, Great Park, and Commercial Leasing. Comparisons with 2016 are affected by the May 2016 Formation Transactions, which added the San Francisco Venture and Management Company and an investment in the Great Park Venture.
Financial results and liquidity
| Metric | Q3 2017 | Nine months 2017 | Comparable 2016 |
|---|---|---|---|
| Revenue | $11.6 million | $117.2 million | $11.1 million and $22.8 million, respectively |
| Net loss | $10.3 million | $57.7 million | $19.1 million and $80.6 million, respectively |
| Net loss attributable to Five Point | $4.5 million | $22.1 million | $6.4 million and $30.2 million, respectively |
| Operating cash flow | $(29.2) million for nine months | $(87.9) million | |
| Cash and cash equivalents | $386.9 million at September 30 | $62.3 million at December 31, 2016 |
- Nine-month revenue rose 413%, principally due to a $91.4 million related-party land sale in San Francisco that closed in January 2017; $9.9 million remained deferred pending infrastructure work. Revenue also reflects management services.
- Q3 included $22.8 million of equity earnings from unconsolidated entities, mainly Five Point’s share of Great Park Venture earnings after basis-difference adjustments. Great Park’s reported segment results include 100% of the venture, though Five Point owns 37.5% and accounts for it under the equity method.
- Great Park Venture closed sales to eight homebuilders for 1,007 homesites during Q3, generating gross proceeds of $474.8 million; some consideration was deferred. This activity was a major driver of equity earnings.
- Assets were $2.50 billion, including $1.39 billion of inventories and $541.8 million of investments in unconsolidated entities. Total liabilities were $678.1 million and total capital was $1.82 billion.
- Reported notes payable were $69.8 million, including a $65.1 million Macerich note and a $4.7 million settlement note. The $65.1 million note bears floating-rate interest, but the Company does not currently accrue interest and considers repayment remote under stated conditions. The settlement note has a $5.0 million principal payment due April 2018.
- Cash from financing activities was $410.4 million for the nine months, primarily from the May IPO and concurrent private placement. Five Point reported no revolver borrowings at September 30; a November 8, 2017 amendment increased commitments from $50 million to $125 million and extended maturity to April 2020.
- Operating cash use improved from the prior period, partly due to the San Francisco land-sale proceeds. Investing cash use included a $106.5 million contribution to the Gateway Commercial Venture. The venture acquired the Gateway Campus for $443 million, using $291.2 million of debt proceeds; its debt is generally non-recourse to Five Point, subject to customary exceptions and specified guarantees.
Material changes and management outlook
- Q3 revenue was broadly stable year over year, while the Company-attributable loss narrowed. Selling, general and administrative expense rose to $37.4 million from $25.4 million in Q3, mainly due to legal costs associated with the Newhall settlement and increased employee and director compensation.
- Management said available cash, noncore land sales, and management-fee collections should meet cash requirements for at least the next 12 months. It expects land sales at Newhall Ranch and San Francisco not to provide significant liquidity within that period, and expects sufficient capital for planned horizontal development for several years, while noting that costs, approvals, and plans could change.
- Newhall development activities began in October 2017; land sales are expected to begin in late 2019. At San Francisco Shipyard and Candlestick Point, the Company expects sales of more than 2,000 homesites between 2019 and 2022. U.S. Navy environmental review issues may delay parcel transfers, now expected in phases from 2019 through 2022.
- Five Point settled with several Newhall project challengers in September. The settlement includes environmental and cultural commitments, development restrictions, monitoring, and greenhouse-gas measures. A $53.6 million liability was recorded; the Company reported a maximum remaining monetary amount subject to its guaranty of $61.6 million, with final payment due in 2026. Two local organizations did not settle and continue to challenge project approvals.
- Significant Newhall litigation remains pending, including challenges to environmental approvals and reapprovals. Outcomes and monetary impacts are uncertain; adverse decisions could delay or alter development, raise costs, or reduce project scope or profitability.
- The Macerich joint venture is redesigning its retail project and assessing milestones. If required land conveyance milestones are not met, Macerich may have rights to terminate the venture, demand repayment of the $65.1 million note, and seek a portion of termination fees. The filing says the redesign may extend the deadline; the outcome was uncertain.
- The $258.1 million tax receivable agreement liability represents expected payments to specified investors equal to 85% of certain realized tax savings. No TRA payments were made in the nine months. The Company recorded a full valuation allowance against its net deferred tax assets, citing its history of losses.
- The filing identifies risks including California real-estate and market conditions, entitlement and construction delays, environmental remediation and regulation, interest rates, financing availability, and dependence on homebuilders. Management stated disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the reported nine-month revenue and earnings reflects unusual or timing-sensitive land sales, deferred revenue, and equity-method activity rather than recurring cash generation.
- Progress on Newhall litigation and settlement obligations, including the $53.6 million recorded liability and the timing and amount of future cash payments.
- Whether the Macerich retail-project redesign and milestone extensions are completed, and whether any repayment or termination-fee exposure arises.
- Timing and cost of U.S. Navy parcel transfers, environmental review, and remaining infrastructure work at San Francisco Shipyard and Candlestick Point.
- Gateway Campus leasing, tenant-improvement spending, and debt terms or guarantees; distinguish venture-level debt from Five Point’s reported notes payable.
- Cash needs, development spending, reimbursement funding, and potential dilution from exchangeable operating-company units, registration rights, and shares available for resale after IPO lock-up expiration.
- Future TRA liability changes and the Company’s ability to realize tax benefits underlying the recorded liability.