Five Point Holdings, LLC — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Five Point is a California master-planned community owner and developer, with operations in Valencia, San Francisco, Great Park and commercial properties.
Financial performance and position
- Revenue: $13.1 million, down 12.7% from $15.0 million a year earlier. Consolidated revenue includes limited land-sale activity; most revenue came from related-party management services.
- Profit: Net income was $52.7 million, versus a $14.3 million loss in Q1 2018. Net income attributable to the company was $23.8 million, or $0.35 per Class A share, versus a $5.2 million loss, or $0.08 loss per basic Class A share.
- Unusual item: Results included a $64.9 million gain from terminating the planned Candlestick retail project and being released from related property-conveyance and development obligations. This was a major contributor to the reported profit.
- Equity-method earnings: $8.9 million, compared with a $3.6 million loss, primarily reflecting Great Park land-sale activity. Great Park Venture recorded $159.2 million in land-sale revenue, including a sale of land entitled for 369 homesites; this venture is not consolidated, so its revenue is not included in Five Point’s consolidated revenue.
- Costs: Total costs and expenses were $35.3 million, down from $38.1 million; selling, general and administrative expense declined 9.9% to $25.8 million. The filing does not present a conventional consolidated operating margin that would be representative given the land-sale timing and equity-method accounting.
- Cash flow: Operating cash use was $83.7 million, compared with $71.2 million used in Q1 2018. Investing activities provided $0.3 million; financing activities used $38.7 million, including repayment of the $65.1 million Macerich note. Cash, cash equivalents and restricted cash decreased $122.1 million to $375.0 million.
- Debt and liquidity: Notes payable, net, were $492.2 million at quarter-end, consisting principally of $500 million of 7.875% senior notes due 2025; the Macerich note was repaid. The $125 million revolving facility was undrawn, with $124 million available after letters of credit. Cash and cash equivalents were $373.3 million.
- Balance sheet: Total assets were $2.89 billion and total liabilities $956.2 million. Inventories were $1.74 billion. The $171.2 million tax receivable agreement liability is also a material obligation. Adoption of lease accounting increased reported right-of-use assets and lease liabilities; management said the adoption materially affected the balance sheet but not operations or cash flows.
Changes versus prior-year quarter
- Reported profitability swung from a loss to income, principally due to the $64.9 million project-termination gain and improved equity-method earnings.
- Revenue declined as consolidated land sales remained minimal and related-party management-services revenue was lower. Great Park’s large land sale drove its segment results, but not consolidated revenue.
- Cash used in operations increased by $12.5 million. Q1 2018 included $5.7 million in proceeds from the golf-course property sale; Q1 2019 included repayment of the Macerich note and approximately $11.1 million of accrued interest.
- Commercial segment revenue rose with new leases, but the segment moved to a loss as the campus became fully placed in service and depreciation, interest and other costs increased.
Outlook, risks and contingencies
- Management expected to begin delivering Valencia homesites in late 2019 and said it anticipated sufficient capital for planned horizontal development for several years. It expected to meet cash needs for at least the next 12 months through available cash, Valencia land sales, investee distributions and management fees; future funding needs or access to financing could change.
- Great Park’s 369-homesite sale included $151.9 million of base proceeds and an estimated $3.6 million of variable consideration; a second take-down was expected to generate an additional $65.6 million in 2019.
- For Candlestick, the company was working with San Francisco on a revised development plan and anticipated city approval before year-end. The remaining approximately 408 acres at The San Francisco Shipyard await Navy environmental transfer review; retesting and related investigations have delayed transfers and could further affect development plans.
- Risks include real-estate and local economic conditions, development costs and approvals, financing availability, environmental matters and litigation. The company disclosed Hunters Point-related lawsuits alleging contamination and inadequate disclosure; it could not predict their outcomes. Petitioners appealed a court ruling in the Valencia approval litigation.
- Other commitments include a $36.5 million liability related to the Valencia settlement, up to $43.1 million of remaining maximum payments under its guaranty, $74.0 million of performance bonds, and San Francisco Venture guarantees with maximum obligations of $197.8 million. These amounts are not all equivalent to expected cash payments.
- No formal earnings guidance was provided. Management cautioned that land-sale timing makes results variable and that Q1 results are not necessarily indicative of the full year.
Most important facts for investors to verify
- How much of Q1’s reported earnings reflects the nonrecurring $64.9 million gain, and how do recurring cash flows compare with reported profit?
- Whether Valencia land deliveries and the expected Great Park second take-down occur on schedule and at the anticipated proceeds.
- How Navy Shipyard retesting, litigation and city approvals affect land transfers, project timing and development costs.
- Whether liquidity, the available revolving facility and expected distributions and fees are sufficient to fund development and debt service.
- The potential timing and cash impact of settlement obligations, guarantees, performance bonds and tax receivable agreement payments.