Five Point Holdings, LLC (FPH) on Q3 2021 Results - Earnings Call Transcript
Operator: Greetings and welcome to the Five Point Holdings LLC Third Quarter 2021 Conference Call. As a reminder, this call is being recorded. Today's conference may include forward-looking statements regarding Five Point's business, financial condition, operations, cash flow, strategy, and prospects. Forward-looking statements represent Five Point's estimates on the date of this conference call and are not intended to give any assurance to the actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could affect future results and may cause Five Point's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described in today's press release and Five Point's SEC filings, including those in the risk factor section of the most recent annual report included in Form 10-K filed with the SEC. Please note that Five Point assumes no obligation to update any forward-looking statements. And now, I would like to turn the call over to Lynn Jochim, President and COO.
Lynn Jochim: Good afternoon, everyone, and thank you for joining us for our third quarter earnings update. This is my first quarterly call as President of Five Point, and I'm joined here today by our management team: Erik Higgins, our Chief Financial Officer; Mike Alvarado, our Chief Legal Officer; and Greg McWilliams, our Chief Policy Officer; and also by Stuart Miller, our Executive Chair; and Emile Haddad, our Chairman Emeritus. I'd like to take this moment to share my appreciation to our board for entrusting me with this leadership role and to my team for remaining by my side as we continue to implement the strategy of Five Point and our vision for the communities. I'm very pleased to update you on the progress of the company and the activity for the quarter. I will also share some thoughts about our strategy going forward. Then Erik will give an overview of the company's financial performance and condition. We will then open the line for questions to our management team. Let me begin by saying that I couldn't be more optimistic about the current position of Five Point as a leader in building blue-chip sustainable mixed use communities. Business conditions continue to be favorable for Five Point and its homebuilding partners. As we noted in our press release, homebuilders are continuing to see strong demand throughout California, and it is especially true in our unique Five Point communities. During the third quarter, we made significant progress in preparing our company and our communities for success. At the Great Park community, home sales remained strong and sold 135 during the third quarter, bringing year-to-date total to 591, which is a 44% increase compared to the first nine months of 2020. Great Park Neighborhoods is now capturing approximately 23% of the new home sales in Orange County over the last 12 months. Additionally, our venture sold 133 home sites to builders this quarter. With the continued strong pace of home sales, we expect to have a meaningful land sale in the second half of 2022. We are also working with the community leaders to pave the way for additional and essential home site entitlements to help our public partner at the city of Irvine to comply with the state housing mandate and to mitigate California's housing shortage. In Valencia, our first home sales have now given rise to our first residents. This community is now starting to really build momentum. Home prices range from approximately $400,000 to $1.3 million. New home sales totaled 156 during the quarter, bringing the total to 199 homes sold since sales commenced in May. This initial activity is occurring within the initial 11 neighborhoods open for sale, and we expect increased sales as an additional seven neighborhoods open for the next quarter. Given strong sales activity, we anticipate meaningful land sales at Valencia in the fourth quarter or the first quarter of 2022. Finally, in San Francisco, where leadership is focused on the need for additional housing, I personally spent numerous days in San Francisco working with our team and the city to optimize the planning and development process so we can activate these extraordinary properties. In summary, this has been an excellent quarter of meaningful progress. Looking forward, the core elements of our strategy will drive the future success of Five Point, and let me briefly review these elements. First, we will continue to build leading sustainable mixed use communities, which we believe will drive short-term and long-term value. Simply put, at Five Point, sustainability matters. While the rest of the world is just talking about sustainability, we remain committed to performance and action. To that end, in Valencia, we are very proud to say that our first homeowners moved into what we believe to be the only certified net zero greenhouse gas community of its size in the country. Together with community leaders and the top development professionals, we have woven sustainability into every element of Valencia, marketed as a feature of community lifestyle and have found it as a recipe for financial success as well. Our new residents live in homes with solar rooftops, zero net energy design elements that provide an energy balanced lifestyle. A Level 2 EV charger is included in every home, and EV charging stations will populate the community to encourage residents to be adopters of electrical vehicles to be part of the transition to clean transportation. The community common areas incorporate and complement the natural environment, whether supporting the reintroduction and expansion of the one spot to the extinct San Fernando Valley spineflower or the conservation of wetlands and wildlife habitat, Valencia residents are an integral part of Five Point's stewardship of these special areas for enjoyment by future generations. In fact, there are 13 components that work together to qualify Valencia as a certified net zero community, and our residents benefit from each of them. After only a few months of selling and before all of our guest builders are open for sale, our newest neighborhoods have captured approximately 24% of total weekly Los Angeles County new home sales on average. Already, our builders are reporting an average home price appreciation of approximately 7% over the past six months of sales. Additionally, our lower-priced homes, which start at less than 50% of the median price of existing homes in Los Angeles County, help address the affordability issues that California always struggled with. We believe building sustainable mixed-use communities make for a better world while enhancing long-term financial value for all of our stakeholders. At Five Point, we can do well while also doing good and that is a core value. Second, we will enhance entitlements to address California's current housing shortage. Each of our communities presents an opportunity to build a void of this housing shortage. In as much as we can help solve the housing shortage, together with our approach to sustainability, we are hopeful that community leaders will work cooperatively with us. Third, we are crafting a renewed strategy approach for the 23 million square feet of planned commercial opportunities in these three communities. Given the location of and the growing population within our communities and the investment we have made in infrastructure and amenities, we are seeing increased demand for our commercial land holdings, where our mixed-use zoning allows for a multitude of uses, allowing us to respond to changing market conditions. Fourth, we will intensify our focus on bringing our extraordinary properties in San Francisco to market. These properties in San Francisco represent a pivotal opportunity to bring Five Point to maximum operational efficiency. Like most jurisdictions in the state, San Francisco is focused on the urgent need for housing, and we are confident that we will reach an accord to activate these extraordinary properties under the proper planning and development plan, where a significant portion of the approved residential homes are planned to be affordable that are urgently needed in the city. We will also continue to hold the Navy accountable to its commitments at the shipyard and transfer the land to us so we can bring the economic and development activity that we and this community were promised so many years ago. And fifth, we will optimize and rationalize our cost structure to properly fit and size scale of our business. This will be an ongoing exercise for us that we expect to evolve over time for a variety of means, including, for example, the adoption of advancing technologies, centralization of critical functions and maximizing our purchasing power, given the size and scale of our developments. I expect to make this a companywide initiative in order to rethink our business practices and efficiencies so that we will drive bottom line performance. So that is our focus and our plan. I, our entire management team and our company are focused every day on each of these five strategic objectives. I plan to report each quarter on our progress on each of these goals as we build cash flow, build our bottom line and learn the confidence of our shareholder base. Let me conclude by saying that our irreplaceable assets and strong business conditions leaves me optimistic about both the long-term and the short-term future of our company. With a clearly defined strategy and a commitment to excellence by our associates, we will continue to lead a sustainable community development while we focus on maximizing returns and driving shareholder value. Now let me turn it over to Erik who will report on our 2021 Q3 financial results. Erik?
Erik Higgins: Great. Thanks, Lynn. Okay, a summary of our financial results was included in the earnings release issued earlier today. I'll start with our consolidated results and then address each of our four segments and conclude with comments about our balance sheet and liquidity position. The Company's consolidated revenues for the third quarter totaled $20.7 million. The Company received a $10 million payment related to a non-residential property, which was initially sold in 2011. The balance of the consolidated revenue for the quarter primarily consisted of $10.2 million in revenue generated from management fee services provided to the Great Park Venture. Our Great Park Venture, an unconsolidated joint venture, sold 113 home sites to builders and eight homes during the quarter, generating sales proceeds of $78 million. Under the equity method of accounting, our consolidated income statement for the quarter does not include the revenues and expenses of the Great Park Venture. Instead, we recognize our share of the net income from the Great Park Venture as equity and earnings from unconsolidated entities. After adjusting for our basis difference, we recognized $367,000 in earnings from our share of the Great Park Venture's net income for the quarter. Total consolidated costs and expenses were approximately $30.9 million, including $20.8 million in selling, general and administrative expenses for the quarter, as well as $8.1 million in expenses incurred in connection with providing management services to the Great Park Venture. Net loss for the quarter was approximately $8.2 million, of which $4.4 million was allocated to the non-controlling interests, leaving $3.8 million attributable to the company. Moving to the segment results. The Valencia segment is consolidated for accounting purposes. The Valencia segment includes our Valencia community that is approximately 15,000 acres in North Los Angeles County and is designed to include approximately 21,500 home sites and approximately 11.5 million square feet of commercial space. Since the initial land sales at the end of 2019, 1,268 home sites have been sold to builders. The third quarter marked a significant milestone for the company as the first homebuyers in our Valencia community moved into their new homes. The sales pace of our guest builders has been strong, and the initial market reaction to the first phase of the community is encouraging. Development of infrastructure improvements and amenities in the community continued during the quarter. While there were no land sales in Valencia during the quarter, we are in discussions with builders for the next round of land sales, which are expected to close either in the fourth quarter or the first quarter of 2022. The Valencia segment revenues were $10.4 million for the quarter, consisting primarily of the $10 million payment received in connection with the non-residential land sale, which initially closed in 2011. Income for the Valencia segment was $4.8 million for the quarter. The San Francisco segment is also consolidated for accounting purposes. The San Francisco segment includes our Candlestick and San Francisco Shipyard communities that are on approximately 800 acres of Bayfront property in the city of San Francisco. Candlestick and ship -- San Francisco Shipyard are currently planned to include approximately 12,000 home sites and approximately 6.3 million square feet of commercial space. The San Francisco segment's net loss for the quarter was $0.8 million, which was primarily SG&A expenses. The Great Park segment includes the operations of the Great Park Venture, the owner of the Great Park Neighborhoods, as well as management services provided by the management company to the Great Park Venture. As a reminder, we own 37.5% of the non-legacy percentage interest of the Great Park Venture and 100% of the management company. The Great Park Venture is an unconsolidated entity, with our investment in the venture accounted for under the equity method of accounting. For segment reporting, we include the full results of the Great Park Venture at the venture's historical basis of accounting. The Great Park Venture is a self-funding operation with no project debt. Great Park Neighborhoods consists of approximately 2,100 acres in the city of Irvine. The community is currently designed to include 10,500 home sites and approximately 4.9 million square feet of commercial space. The Great Park's segment revenues were $92.5 million for the third quarter. The sale of 113 home sites during the quarter contributed $66.5 million to revenues. In addition, eight of the 38 homes under our previously announced fee build program, closed during the third quarter, contributing $12.9 million in revenues. Also included in the segment revenue was approximately $10 million in management fee revenue, which was recognized by the management company for services it provided to the Great Park Venture. Net income for the Great Park segment totaled $9 million in the third quarter, which included $7 million from the Great Park Venture and an additional $2 million related to the management company. While the Great Park Venture did not make any distributions to its members during the third quarter, we expect distributions to coincide with the next meaningful land sales, which we believe will occur in the second half of 2022. Our Commercial segment includes operations of the Gateway Commercial Venture and management services provided by the management company to the Gateway Commercial Venture. We own 75% of the Gateway Commercial Venture and 100% of the management company. The Gateway Commercial Venture is an unconsolidated entity, with our investment in the venture accounted for under the equity method of accounting. After selling three of the four buildings located on the campus in 2020, the Gateway Commercial Venture currently owns one building and approximately 50 acres of commercial land with additional development rights at the campus. Commercial segment revenue was $2.2 million for the quarter, and net income was approximately $48,000. I'll wrap it up with a few comments related to our balance sheet and liquidity position. As of September 30, total liquidity was approximately $315.8 million, which was comprised of cash and cash equivalents totaling $191.1 million and borrowing availability of $124.7 million under our $125 million unsecured revolving line of credit. Our balance sheet is solid with a debt to total capital ratio of 25.3%, and our net debt to total capital ratio after taking into account our cash balance is 19%. With that, let me turn it back to the operator, who will now open it up for questions.
Operator: Thank you. And we'll take our first question from Alan Ratner with Zelman & Associates. Your line is open.
Alan Ratner: Hey guys, good afternoon, and Lynn, congratulations on the new opportunity and role, looking forward to chatting with you going forward. So first question, just as far as the outlook on Valencia land sales either next quarter or the first quarter of 2022. I was wondering if you could give us a little bit of a framework on what to expect there. I think in the past, you might have indicated, in addition to lot sales, maybe there were some opportunities for apartment sales or maybe even commercial sales. I'm just curious how you see that playing out over the next few quarters.
Lynn Jochim: Thank you. And thank you for your kind words for my first call today. Yes, we are currently speaking with the builders, many of them who are -- already been a part of the Valencia community and have had great success up there when we opened earlier this year. We are in conversations with them on home sites that we're hoping then they have the opportunity to themselves bring to market in later of 2022 in new homes. We are continuing to evaluate the apartment opportunities, as well as the commercial opportunities up there.
Alan Ratner: Got you. But at this point no target number of lots or acres or anything you want to put out there just as far as helping us thinking about the next quarter or two on the model?
Lynn Jochim: Overall, I think we are looking to at least get a few -- 300, 400, 500 homes, maybe 500 homes out there to be able to continue the homes that are already selling. We're -- like I said, the homebuilders are seeing successes, and they are looking to carry on and keeping their programs going.
Alan Ratner: Got it. Okay, that’s helpful, at least on the 500 mark. Second question, maybe this one's for Erik. But just thinking about the balance sheet. Obviously for now, the liquidity position remains quite strong but the current cash balance has been continuing to drift lower here. And obviously, the San Francisco project is the big wildcard and whenever that kind of gets off the ground, I would imagine there's going to be some upfront development costs and expenses that need to go along with that. So how are you thinking about the cash position? And thinking 2022, 2023, assuming San Francisco is able to kind of get off the ground here, is there the potential for another debt raise, capital raise that would need to fund that? Or do you think the Valencia and Great Park distribution is enough to kind of satisfy the funding for the first round of development there whenever it occurs?
Erik Higgins: Hey thanks, Alan. Look, at $191 million we feel very comfortable that we have sufficient capital and liquidity to continue implementing on our strategy at Valencia, and we anticipate distributions from the Great Park Venture as well to augment that. And so we're not planning on San Francisco contributing in the next year or two. And so we don't have any plans to raise additional equity or additional debt because we feel very comfortable with the liquidity position that we have right now and looking at our cash coming in from land sales and cash going out toward inventory expenditures to further develop land.
Alan Ratner: Great. Okay. Thanks. Good luck, guys.
Operator: Next, we'll go to Stephen Kim from Evercore ISI. Your line is open.
Stephen Kim: Yes, thanks very much guys, and let me also add my congratulations to Lynn. I wanted to start off by addressing something that you all referred to with respect to addressing the chronic housing shortage in California. I was curious as to -- I know that recently, there's been some movement in the state to sort of directly tackle that. I was curious if you could talk about perhaps how Five Point, with its unique positioning in the market, to what degree are you involved in some of those conversations? And have you seen anything in particular that plays particularly to your strengths or things that you can do to improve the situation?
Lynn Jochim: Thank you, Stephen, and again, thank you for the kind words for today at my first call. As you know, where we are located in these three very strategic marketplaces, they are locations that have had very little supply over the years and jurisdictions that today, because of the state mandate, are looking to expand their housing market. We have been in discussions in Irvine for some time since the program came out called the RHNA program, Regional Housing Needs Assessment across the state of California, which went -- has gone through the state and evaluated the housing needs in every jurisdiction across the state. Irvine itself is one that we -- like I said, we've had a lot of conversations with. We have engaged with them on opportunities here at the Great Park and how we can provide the necessary housing that they have been targeted to deliver in order to meet the state needs. So that's Irvine. We're still working through what that means, how much that would be and what kind of type of houses that would be. In our other markets, in Valencia and in San Francisco, where we have been approved for substantial housing in these marketplaces, we are continuing to work with those jurisdictions to get that market online and out to the community and out to the homebuyers as quickly as we can and coordinating with them on different opportunities in order to do that.
Stephen Kim: Yes, that certainly seems like you all are doing your part. My second question actually relates to the actual bringing of these communities online and bringing this product to the market. One of the things we've obviously seen over the last nine months has been a real sea change in the -- where the bottlenecks are, particularly the builders have found that access to materials with the supply chain to functionality has superseded their access, their troubles gaining access to incremental lots, for example. I'm curious if there's anything that you've seen over the last nine months, let's say that has altered your thinking at all with respect to your builder-partners, for example. Have you seen any material difference in builder’s ability to navigate through some of these issues? Have you -- any thoughts that perhaps the ability to support incremental units is maybe a little less than you had previously thought as a result of some of these bottlenecks and supply chain problems lasting maybe a little longer things of that nature? I'm curious if anything about the supply chain problem over the last nine months has changed your thinking at all about your future plans.
Lynn Jochim: And thank you again. And it really hasn't, Stephen. We are -- have been partners with our builders in these communities for quite some time. And we work as partners we solve problems as partners as, like I said, they have been repeated buyers. I know that many of the builders are navigating their waters through finding resources and things in order to deliver homes. But we have not seen any issue right now, as we speak, to their ability to continue to be active in our communities going forward.
Stephen Kim: Okay. That’s encouraging. Thanks very much.
Operator: And at this time, I'll turn it back to Lynn Jochim for closing remarks.
Lynn Jochim: Thank you, all. I just wanted to say again, there's always the first day for everything, and we appreciate you participating in the call, and thank you again.
Operator: And that does conclude our call for today. Thank you for your participation. You may now disconnect.
