Five Point Holdings, LLC — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Five Point owns and develops master-planned communities in California, including Valencia, Candlestick and The San Francisco Shipyard, and Great Park Neighborhoods. Financial figures below are in U.S. dollars; dollar amounts are rounded.
Financial performance and liquidity
- Q3 revenue: $12.0 million, down 7.5% from $13.0 million. The quarter produced a $23.0 million consolidated net loss, compared with a $21.9 million loss in Q3 2018. Net loss attributable to the company was $10.7 million, versus $10.0 million.
- Nine-month revenue: $37.5 million, down 8.7% from $41.0 million. Consolidated net income was $7.2 million, compared with a $47.5 million loss; income attributable to the company was $2.6 million, versus a $20.4 million loss. The year-to-date improvement principally reflects a $64.9 million gain from settling contingent consideration and being released from obligations after the Retail Project was terminated.
- Costs and margins: Nine-month costs and expenses were $104.9 million, down from $109.1 million; SG&A declined to $77.6 million from $83.8 million. Management-services costs rose to $22.8 million from $20.5 million, mainly due to amortization. Conventional consolidated operating margins are not a useful comparison given the land-development business and the large unusual gain.
- Cash flow: Operating cash use was $251.2 million for the first nine months, compared with $239.7 million in 2018; investing activities provided $0.5 million, versus $3.8 million used; financing provided $85.7 million, versus $10.1 million used. Cash and cash equivalents were $330.4 million at quarter-end, down from $495.7 million at December 31, 2018.
- Debt and liquidity: Notes payable, net, were $615.7 million, including $625 million principal of 7.875% senior notes due 2025; the company issued $125 million of additional notes in July. The $125 million revolving facility had no borrowings and $124 million available after letters of credit. Reported total liabilities were $1.108 billion.
- Other metrics: Total assets were $2.997 billion and total capital was $1.864 billion. No distributions were declared. The company’s 37.5% Great Park Venture and 75% Gateway Commercial Venture are equity-method investments, so their full operating results are not included in consolidated revenue and expenses.
Changes versus the prior period
- Q3 revenue declined mainly because of lower Valencia operating-property revenue; related-party Great Park management services remained the largest source of consolidated revenue.
- Nine-month revenue was lower, largely because a San Francisco management-services agreement expired in December 2018 and Valencia operating-property revenue fell. Great Park Venture land sales supported higher equity-method earnings.
- The $64.9 million Retail Project settlement gain drove the nine-month return to consolidated net income. Separately, Five Point repaid the $65.1 million Macerich note and approximately $11.1 million of accrued interest.
- Cash declined amid continuing development investment. The company issued additional senior notes and received $25 million for San Francisco Venture Class C units.
Outlook, risks and unusual items
- Management expected Valencia homesite deliveries to builders to begin in late 2019 and said it expected to meet cash needs for at least 12 months through available cash, Valencia land sales, venture distributions and management-fee collections. It anticipated the San Francisco communities would not provide significant liquidity within the next 12 months. Management said it currently expected to fund planned horizontal development for several years, while cautioning that additional capital might be needed if costs or plans change. No formal earnings guidance is provided in the filing.
- Great Park Neighborhoods received approval for 1,056 additional homesites. The Great Park Venture recorded 518 homesites sold in the first nine months, with initial gross proceeds of $217.5 million; these venture-level figures are not equivalent to consolidated company revenue.
- San Francisco Shipyard land transfers remain exposed to delays from Navy environmental retesting following allegations concerning a contractor’s sampling work. Related lawsuits seek damages and other relief; the company says it cannot predict their outcomes. The filing also describes an appeal concerning Valencia project approvals.
- At September 30, outstanding performance bonds were $218.2 million; the San Francisco Venture had maximum infrastructure and park-obligation guarantees of $197.8 million. These are contingent commitments, not reported debt balances. Valencia settlement obligations included a $17.7 million liability and a stated remaining maximum payment amount of $23.7 million through 2026.
- Other risks include California entitlement and regulatory conditions, development costs and timing, real-estate market conditions, interest rates, litigation and access to financing. The company reported no material change in its risk factors from its 2018 Form 10-K.
Important facts for investors to verify
- Whether Valencia land deliveries and related cash receipts commenced on schedule, and whether cash use remains consistent with management’s liquidity expectations.
- How much of the nine-month earnings improvement is attributable to the nonrecurring $64.9 million settlement gain rather than ongoing operations.
- Progress and timing of Navy retesting and remaining Shipyard land transfers, and any material developments in related litigation.
- Cash requirements and potential exposure from development bonds, guarantees, Valencia settlement payments and the San Francisco Venture Class C units.
- Debt-service capacity and the availability of the revolving facility as development spending continues.