Five Point Holdings, LLC — Q2 2018 Form 10-Q
Business context and reporting period. Five Point develops master-planned communities in California: Newhall Ranch, Candlestick Point and The San Francisco Shipyard, and Great Park Neighborhoods. It also manages and holds an equity-method interest in the Great Park and Gateway Commercial ventures. This unaudited report covers the three and six months ended June 30, 2018; results are volatile because land sales occur irregularly.
Financial performance and position
| Metric | Q2 2018 | Six months 2018 | Comparable 2017 period |
|---|---|---|---|
| Revenue | $13.1 million | $28.1 million | Q2 $13.2 million; H1 $105.5 million |
| Net loss | $11.3 million | $25.6 million | Q2 $24.3 million; H1 $47.4 million |
| Net loss attributable to Five Point | $5.2 million | $10.4 million | Q2 $9.8 million; H1 $17.6 million |
| Operating cash flow | H1 use of $164.9 million | H1 provided $1.1 million |
- Q2 revenue was nearly flat year over year, while H1 revenue fell 73%, primarily because H1 2017 included an $84.0 million related-party San Francisco land sale. H1 2018 also included the Great Park Venture’s May sale of land for 536 homesites, generating $170.3 million of segment land-sale revenue, including estimated variable consideration.
- Losses narrowed versus 2017, supported by stronger Great Park land-sale activity and equity earnings from unconsolidated ventures. These improvements were partly offset by higher management-service costs, including amortization of the Great Park management-contract intangible, and increased corporate expenses.
- Cash and cash equivalents were $678.6 million at June 30, versus $848.5 million at year-end 2017. Inventories were $1.547 billion; total assets were $2.958 billion. Operating cash use reflected development spending, an inventory increase of $129.4 million, and interest payments.
- Notes payable, net, were $556.4 million: $500 million of 7.875% senior notes due 2025 and a $65.1 million Macerich note, partly offset by unamortized costs and discount. The $5.0 million settlement note was repaid in April. The company reported no revolver borrowings and $124.0 million available after letters of credit.
- H1 cash from investing activities was $5.2 million; financing activities used $10.1 million. No income-tax benefit was recorded, as valuation allowances offset deferred-tax benefits. No distributions were declared.
Changes, outlook and material matters
- Accounting comparability: Five Point adopted ASC 606 on January 1, 2018 using the modified retrospective method; 2017 comparatives were not restated. The new rules recognize estimated variable management compensation over time and certain estimated land-sale fees at sale. Adoption increased reported H1 net income by $5.2 million versus the former method, but did not affect cash flows. H1 contract assets rose to $50.9 million, largely due to revenue recognized before contractual payment is due.
- Management outlook: The company said available cash and management-fee collections should meet cash needs for at least the next 12 months, and it currently expects sufficient capital for planned horizontal development for several years. It also cautioned that 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. No quantified earnings or revenue guidance was provided.
- Development and legal risks: The transfer of approximately 408 acres at The San Francisco Shipyard remains subject to Navy environmental review and additional sampling following allegations of contractor testing misconduct. The company warned this could delay transfers and development; related class and personal-injury lawsuits were filed, with outcomes not predictable. Certain Newhall environmental challenges also remained pending, although several rulings and settlements favored the company.
- Mall project uncertainty: The Candlestick Point retail project’s viability is under review amid changing retail conditions; alternative site configurations or uses are being explored. The Retail Project Property had not been conveyed by June 30, and potential consequences under the Macerich arrangements include repayment of the $65.1 million note and termination fees if applicable conditions are not met.
- Commitments: Outstanding performance bonds were $73.5 million; San Francisco Agency infrastructure and park obligations carried maximum guarantees of $197.8 million. The Newhall settlement liability was $39.2 million, with up to $47.2 million of remaining monetary payments covered by a company guaranty through 2026. The tax receivable agreement liability was $168.0 million; no TRA payments were made in H1.
- Other risks cited include California real-estate and regulatory conditions, development costs and timing, interest-rate exposure, environmental liabilities, insurance adequacy, and access to financing. A 100-basis-point change in floating rates would change annual interest expense by about $0.7 million.
Most important facts for investors to verify
- Whether Great Park land-sale proceeds and management-fee collections can sustain liquidity as development cash use continues.
- The timing and cash impact of Great Park variable incentive compensation, including the $50.9 million contract-asset balance and the $71.2 million remaining performance-obligation estimate.
- Progress on Shipyard environmental retesting, Navy land transfers, and the outcome or financial exposure of related lawsuits.
- The status and potential financial consequences of the Candlestick Point retail project and Macerich arrangements.
- Funding needs and exposure under development guarantees, performance bonds, the Newhall settlement, and the TRA.
- How much of the apparent year-over-year earnings improvement reflects actual operations versus ASC 606 timing and estimates; prior-period results were not restated.