Five Point Holdings, LLC (FPH) Q1 2018 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Five Point Holdings, LLC, First Quarter 2018 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Bob Wetenhall, Executive Vice President of Capital Markets. Please go ahead, Bob.

Thank you, good afternoon. Today's conference call may include forward-looking statements regarding Five Points' business, financial condition, operations, cash flows, strategies, and prospects. Forward-looking statements represent only Five Points' estimates on the date of this conference call and are not intended to give any assurance as to 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 Points' 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 Points' SEC filings, including those in the Risk Factors section of the most recent Annual Report on Form 10-K filed with the SEC. Please note that Five Point assumes no obligation to update any forward-looking statements. Thank you for joining us on our first quarter conference call. I'm here this afternoon with CEO, Emile Haddad; CFO, Erik Higgins; Chief Legal Officer, Mike Alvarado; Chief Policy Officer, Greg McWilliams; and our Co-COO's, Kofi Bonner and Lynn Jochim. I'm going to hand it off to Emile who will provide a brief recap of first quarter results as well as his current outlook. Erik will then provide additional detail regarding our recent financial performance and liquidity.

Thanks Bob. Let me start by saying that the operational momentum that we had at the end of last year carried over into the first quarter of 2018. California's economy remains healthy. The combination of land constraints that have limited residential complexion activity and vibrant job growth in San Francisco, Los Angeles, and Orange County have created strong tailwinds that can support home price appreciation and an increase in the value of our land portfolio. We expect that these trends will persist during the balance of the year. Starting with Newhall Ranch in Valencia, our development activities have continued since our last conference call. Accordingly, we remain on track to start delivering homesites to builders in Mission Village towards the end of 2019. We think that the combination of robust job growth and the limited availability of homesites in Los Angeles County will result in strong demand at Mission Village, which is approved for up to 4,055 homesites and approximately 1.6 million square feet of commercial development. Switching to San Francisco, as noted on our last call, we have moved our focus to Candlestick where we are continuing to move forward with infrastructure development. We are also looking on the redesign and the proper mix of uses at Candlestick Point in light of the rapidly changing retail environment. We also received milestone approvals from three important governmental bodies as it pertains to our efforts to secure an additional two million square feet of commercial entitlements spread across our communities in San Francisco, and we anticipate receiving final approval before the end of the year. I also want to provide an update regarding recent events at the Shipyard. Over the past few weeks, there has been renewed attention to expedite finalizing the work plan for any retesting of the site. As recently as this morning, the House Democratic Leader and Former Speaker, Congresswomen Nancy Pelosi sent a letter to the Secretaries of both the Navy and EPA to bring increased urgency to retesting on the site. Additionally, she noted that she has recently secured additional funding in the amount of $36 million that is earmarked for retesting efforts of the Shipyard. With respect to timing, as recently as last week, the Navy shared it's schedule with the community showing the timeline for the future conveyance of land parcels that is consistent with prior schedules. We would continue to monitor these schedules as the Navy and the City provides updates to us. As we speak today, the Board of Supervisors in San Francisco is holding a hearing on these matters, which should provide more clarity with respect to the timing and the process. In the Great Park neighborhood, consistent demand and the limited supply of housing in Irvine have supported the brisk pace of sales since the start of the year. Parasol Park is substantially sold out, and sales at Cadence Park, our newest neighborhood which opened its first phase in March are off to a good start. We're excited about Cadence Park for many reasons. Cadence features seven builders offering 14 [ph] products on slightly more than 1,000 homesites. It is important to highlight that we have intentionally sold to create diverse product offering that can meet the needs of a wide range of buyers. For example, the square footage of new homes ranges from a low of 1,650 square feet which is priced in the mid-600s to a high of more than 4,500 square feet which is priced at almost $2 million. I also want to bring you up to date on recent developments at Great Park Venture that transpired after the end of the quarter. In April, the Great Park Venture made a distribution of $235 million to legacy investors that had [indiscernible] on cash flow. And in May, the Great Park Ventures sold 33 acres for $166 million. This translates into a price of approximately $5 million per acre and validates our view of the residual value of our assets. With that, I'd like to turn it over to Erik to discuss our financial performance.

Thanks Emile. A summary of our financial results was included in the earnings release issued earlier this afternoon. As we've discussed on previous calls, our consolidated financial results for the next few quarters will reflect our continued investment in planning and development at Newhall Ranch and Candlestick Point. As a reminder, our Newhall and San Francisco communities are wholly-owned and thus consolidated on our financial statements while the Great Park Venture and the Gateway Commercial Venture are unconsolidated entities that are accounted for using the equity method of accounting. Revenues for the first quarter of 2018 totaled $15 million and were primarily generated from management fees and agricultural operations. Revenue this quarter reflects the absence of residential land sales during the quarter. Other income of $12.5 million reflects the $6.7 million gain on the sale of the TPC Golf Course in Valencia. Net cash proceeds from the sale were $5.7 million. Additionally, the buyer assumed certain liabilities associated with the Golf Course. The additional components of other income, our interest income of $2.7 million and $1.9 million in income due to the change in estimate which decreased the liability associated with our tax receivable agreement. For our unconsolidated investments, which include our 37.5% interest in Great Park Venture and our 75% interest in the Gateway Commercial Venture recognized a loss of $3.6 million. Great Park Venture’s net loss for the quarter was $14.7 million due primarily to the absence of land sales. Our 37.5% proportionate share of this loss, after adjusting for the basis difference, was $4.1 million. Gateway Commercial Venture’s net income was $600,000 for the quarter and our 75% proportionate share of this income was $450,000. Corporate and divisional SG&A was $29 million for the quarter and net loss for the quarter was $14.3 million. It's also worth pointing out on January 1, 2018; we adopted a new revenue recognition standard, ASC 606 revenue from contracts with customers. The immediate impact of implementing this new revenue standard was an increase to capital of approximately $25 million. The primary components of this adjustment were recognition of deferred revenues and marketing fees from prior period land sales, and the recognition of incentive compensation we expect to be entitled to under our development management agreement with Great Park Venture. Going forward, the impact of applying the new revenue standard will be to more closely match the recognition of revenue under our purchase and sale agreements, our development management agreements, and other revenue generating contracts with the transfer and control of goods and services regardless of when the cash is actually received. Now let me address some of the changes in our balance sheet during the quarter. Inventory increased by $46 million. The net increase is the result of $55 million in additions to inventory offset by inventory release of $9.5 million in connection with the recognition of deferred revenue related to the implementation of the new revenue recognition standard I just discussed. Related party assets rose by $42 million reflecting an increase in contract assets or receivables related to the adoption of the new revenue standard and recognition of revenue before the receipt of the cash. Our cash balance at the end of the quarter was $778 million which was a decrease of $70 million. We had no outstanding borrowings under our $125 million corporate revolver resulting in total liquidity of approximately $900 million. Total book capital at the end of the quarter was $1.9 billion and our debt to total capital ratio remained unchanged at 24%. Let me turn it back to the operator now, who will open it up for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from Michael Rehaut of JPMorgan. Please go ahead sir.

Hey afternoon. This is Jason Marcus in for Mike. I guess, I just wanted to start out on Great Park, maybe can you talk a bit more about the demand that you're seeing and may be how the newest neighborhood is trending relative to your expectations?

Well, as I said, the demand is very strong. We're seeing a very consistent sales program going on since we opened Cadence. Parasol has sold out, and we're seeing a very consistent sales pace to the one that we've seen for the last two or three years actually.

Okay, that's helpful. And then maybe if you could touch on the solar mandate in California, what you're seeing there, maybe any impact on affordability?

The -- it's brand new and I think there's a lot of debate as to how much it’s going to impact affordability. I think you have a lot of people who are looking at the absolute dollars needed, but there's also I've seen a lot of analysis on the amount of monthly cost versus monthly savings, so I can't comment on the net-net cost just because I haven't seen all of that analysis done. What's more important for Newhall Ranch since which is our biggest project, we have made a commitment before this came into play to be a net zero Greenhouse gas emission, and therefore a 100% of our homes are going to be solar. The Great Park neighborhood, every home that we design is designed for solar panel, some builders are using that like Lunar uses solar in all their homes, other builders have different decisions. But in terms of the cost, honestly I think it's still brand new, this is 48 hours, so I don’t want to comment on dollars until I see full analysis.

The next question comes from Thomas Maguire of Zelman & Associates. Please go ahead.

Hey guys good afternoon and congrats on the continued progress across the portfolio.

Thank you.

Quickly, I just wanted to touch on the management services side of the business with the recent transaction over Treasure Island, it looks like you guys weren't involved there and had been a manager on the project or still are. Understanding it's a small piece of the strategy, does kind of that ownership change effect to go for forward interest or management fee there at all are anything we should keep in mind with that change?

Yes, first of all, I mean it's really – you used the word strategy, our management arrangement at Treasure Island was not a company strategy, it was done out of a necessity of transition between Lunar's management team and the Five Point's management team, so we’re providing that as service because of that transition. As it relates to fees, yes over time, I mean, once we phase out, we will not be receiving the fees that we are receiving today on Treasure Island, but as a result of our anticipation of that, we have been working with Kofi and his team up there to make sure that the offset on G&A, that was expected to actually be associated where that fee would be -- will create a loss in terms of the company's impact.

Got it, thanks. That's really helpful, and then just on the development side of the business, I don’t know if you have a firm number out there, but just any thoughts on what you’re targeting for 2018 land spend in development spend in total or alternatively just any qualitative thoughts as to whether that's changed or kind of trended directionally relative to your expectations headed in the year?

No, we don’t have a number like that and typically we don’t disclose it, but nothing has changed. We have already stated in the last two or three quarters that the land development process in Newhall fortunately ended up happening a year earlier than we thought, so we’re spending lot of money in Newhall in land development. In terms of San Francisco, the shift to Candlestick actually gives us the opportunity to have less than we expected originally in terms of land development spend, and as you know, the Great Park Neighborhood is a standalone entity that has its own funding.

The next question comes from Nishu Sood of Deutsche Bank. Please go ahead, Nishu.

Thank you. First question on Newhall, the late 2019 release at Mission Park, what's the latest on what you’re expecting in terms of the number of lots to be released there and how that might -- what numbers you might get in terms of lots that move in 2019 and in 2020?

Sure. Well, Hi Nishu, this is Emile. We right now, I think that we are working towards at least 500 deliveries at the end of 2019, but hopefully when you combine end of 2019 through the first quarter of 2020 which from a land development point of view, you really can’t pin it down sometimes to a month, we are hoping that that number will be closer to 1,000. So I would say that the goal right now in which we’re working toward is delivery of about 1,000 homesites some time within the period of the end of 2019 through the first two quarters of 2020.

Got it. Okay. And the Hunter's Point detail, appreciate the color there. Just in terms of the landscape on the soil testing et cetera there, some additional questions that are being put out there about the existing areas of development, did your comments encompass that or is that something additional to be resolved in terms of getting back on track in terms of delivery of the land and construction schedules?

Yes, the only part of my comment that involved that is my reference to the letter to both Secretaries the EPA and the Navy from the Former Speaker of the House, where she requests from both of them a scanning of what is referred to as Parcel A which I think is the parcel that you’re referring to. That parcel was used for housing and was never used for industrial purposes, and the letter -- which I'm sure is a public letter states that notwithstanding because of a lot of concerns of people over there and there is a request of scanning of that area as part of the whole process.

Got it, got it. Okay helpful and just final one, a quick follow-up on the solar question, you bring up a good point there costs are still to be determined, there is offsets in terms of electricity savings and it’s pretty small increment against what you sell those units for generally across the board, what about on the affordable side of things though, is there any potential offset there on the affordable deliveries?

If you're talking about the affordable meaning the affordable housing that we're required to provide in certain of our communities, is that your question?

Yes.

Yes. Those homes are typically subsidized anyway and when you look at the where our market rate pricing is versus where these homes end up being priced for as far our requirement, the additional panels will really not be a big incremental increase in the subsidy.

The next question comes from Stephen East with Wells Fargo. Please go ahead.

Yes, this is actually Paul Przybylski on for Stephen. Following on Nishu’s question about Hunter's Point, if they were to retest the hill top portion, would you have any sort of liability if the soil was found to be contaminated and also along those lines, how sales been progressing there given all those publicity?

Sure. So, Paul in terms of the land get answer of liability, under the brac which is basic the alignment enclosure legislation, the liability of any of the Greenhouse space with the Navy and the Navy indemnity stands behind it. So when you ask about liability, the answer is no. There is no liability to us or to the builders, it stays with the Navy. Parcel A though is not a Parcel that we own or redeveloped, it was actually a parcel that was retained with Lunar and they’re the ones who are building and selling homes. So the question is to the sales and all that is much more appropriate of them. But the answer to the question of liability is that we do not have any exposure to liability over there, the only exposure we have potentially is a delay of timing of delivery of parcels and that’s why we shipped it to Candlestick Point when this subject being discussed. Although as I said as of last week, the Navy's schedules did show consistency of delivery with previous schedules.

Okay. And as you work through the mall planning with Macerich depending on the ultimate outcome of that, what kind of impact would that have on your loan with Macerich?

Well, I mean the impact would be if a decision was made by Macerich and by us to unwind the deal then it's stated liability on our balance sheet and we will just give them back the amount of cash which is about $65 million or so and basically get back the 50% interest in demand that they own assuming that that is the conclusion. Obviously we’re not there yet but that will be the exposure.

Okay. And then just one last one on the Great Park Sale in May, what are those going to be single-family attached or detached and what price points should we be looking forward there?

Well, our products that we're doing right now at the Great Park is a mixture of actually attached and detached including what we refer to as single -- as detached condominium which is a hybrid. And as I stated what we would do over here is every time we come out with a neighborhood we try to pay the diversity of pricing and product offering to cater to a very broad base. So we would expect that to be -- that neighborhood to be more on the lower side because it’s higher density product than Cadence when you look at it on a blended basis.

The next question comes from Stephen Kim with Evercore ISI. Please go ahead.

Good afternoon, this is actually Chris Shook on for Steve. Thanks for taking my question. Just wondering from a high level perspective, do you have any interest in pursuing any land banking activities outside of your existing portfolio at this juncture?

Look, we will have an interest in pursuing anything strategically that fits within the companies capability and strategy and land banking could be one that we will be looking at in the future subject obviously to liquidity but it is one of those strategies that we have been talking about and potentially could be pursuing.

And would you like to do sort of any strategies outside of California?

No. Our -- the company is going to be only occasionally a focused company and mainly in the primary markets in California focusing on value creation in areas that we can bring our own expertise to as a certain task. If there is opportunities that are not going to be organic growth those will be refocusing of space which is an area that we feel we have a lot of strength.

The next question comes from Will Randall with [indiscernible]. Please go ahead.

Hi, good afternoon. This is Ken Wing [ph] on for Will. Circling back to Great Park where you sold 33 acres this quarter, I know it's a little bit lumpy but is there anything you can share in terms of phasing of the land sales in Great Park for the rest of 2018?

Sure. We actually end up delivering to the market homesites that are consistent with the amount of absorption at homes. We try to dovetail our new neighborhoods with the build-out of neighborhoods that are already in progress. So at the pace that we were seeing today, there is the possibility of another 500 homesites that we will probably bring to the market towards the end of the year assuming that the market stays performing at the same absorption rate that we're seeing today.

Great, thank you for that. And it sounds like pretty good progress at Candlestick for the commercial square footage and specifically what is needed for the final approval for that?

So I mean the process goes through different queries of government for approval like planning commission. The final approval will be the board of supervisors approval and the free approvals we have gotten mainly from transportation as well as from the Planning Commission had been unanimous approvals and that give us a lot of comfort that it means that there is a lot of support for the process within the City of San Francisco and we expect the Board of Supervisors to approve it and give us the final blessing by before the end of the year.

The next question comes from Michael Eisen with RBC Capital Markets. Please go ahead.

Good afternoon guys. Just following up on some of the questions of the land sale you guys had since the end of the quarter, when you look at that kind of $5 million per acre spend at a average is that kind of the average of what you're seeing for the land there, is this kind of a more premium or a more discounted parcel of land and how should we think of this compared to kind of your prior estimates when we're originally talking a year ago at this point?

Well as I said I mean these values are consistent with the escalation of pricing that we were looking at year ago. But the last I think when we were talking a year or so ago, we’re talking about something in the $4 million an acre in the Cadence which was our last sale that was $4.650 million an acre and this latest sale is a $5 million an acre. So the point is that we are seeing an escalation of price per acre that is very much consistent with our view of the appreciating land portfolio that we own.

Got it. That’s really helpful and then when thinking about some of the commentary coming out of the builders and what we're seeing in the market for input cost inflation of raw materials and labor, can you talk to kind of what you're seeing and the conversations you're having with your builders in the current environment and what that means for you guys profit sharing on the development on some of the communities that are active at this point?

Sure. We're hearing from the builders the same thing you're hearing that they are starting to feel pressure on the cost side. Honestly, I think we were hearing more about that about a year ago and we're hearing -- we've been hearing lately and at least in the late sales that we have as we were in discussions. It was less of an issue then probably about a year-and-a-half ago. So in terms of profit sharing, we share with the builders on a free tax basis. So obviously if after the sale of there is continued escalation in costs that will have an impact on the profit sharing assuming that the homeprice appreciation is not increasing at a rate that’s higher than the cost escalation. So I can't comment on it because you have to look at the two variables together.

Sure. And that’s very encouraging about the cost side and then one last question if I could sneak it in, there has been a lot of investor concerns recently about higher interest rates and what that means to affordability and view for demand and housing in the cycle. Can you kind of remind us what percentage of the buyers in your markets are typically cash buyers and whether you’ve seen any sort of slowdown in the communities that are already selling and kind of how this is actually playing out on the ground compared to what investors are concerned with?

So, in Newhall obviously we don’t know yet because we haven’t started home sales but we have a very good view on a significant amount of home sales that had happened at the Great Park and 40% of the Great Park of our buyers are, the buyers over there have been cash buyers and of the other 60%, 40% of them have -- I’m sorry for the other percentage 60% of them have been putting more than 40% down payment.

There are no more questions at this time. This concludes the question-and-answer session. I’d like to turn the conference back over to Emile Haddad for any closing remarks.

Well, thank you very much. Appreciate everybody’s listening and as you can see, we are moving forward very consistently with previous guidance and with now all three assets being operational, we are very excited about the balance of 2018 and really looking forward to a milestone of a year for 2019 for the company. Thank you very much.

This concludes today’s conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day.