Five Point Holdings, LLC (FPH) Q2 2020 Earnings Report, Transcript and Summary

Good day, everyone. Welcome to the Five Point Holdings Second Quarter 2020 Conference Call. [Operator Instructions] As a reminder, this conference 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 only Five Point’s estimates on the date of this conference call and are not intended to give any assurance as 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 results or activities 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 Factors section of the most recent annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC. Please note that Five Point assumes no obligation to update any forward-looking statements. And now I’d like to turn the call over to Mr. Emile Haddad, Chairman and CEO of Five Point. Please go ahead, sir.

Thank you very much, operator. Hello, everyone, and I hope that as we have this call, everyone on your side is healthy and safe. Our last earnings call on May 21, we shared with you that the company had implemented a COVID-19 contingency plan, which was focused on preserving our strong liquidity position. The levers that we pull on to do so are: one, an ability to shutdown two-thirds of our operational expenditures on short notice; and two, with 50% of our employment-related G&A costs are discretionary. In May, we shared that in light of the uncertainty at that time, we had shut down all land development activities, except those needed to support our existing builders. We did that, assuming the economic conditions were going to hold land acquisitions by builders. We also shared that we have started seeing home sales go back to a pre-COVID-19 level at the Great Park, but we didn’t have enough data to draw any clear conclusions. The good news is that today, we can look back and see a very consistent sale base over the 12 weeks since our last call. The median number of home sales in the first quarter was 10 sales per week. In the second quarter, it was eight sales per week. And so far, this quarter, it has been 12 sales per week. I am sure that most of you have seen of you have seen the strong reporting of sales from the public builders. We see the positive sentiment that builder reflected in the engagement we have with them on purchasing homesites in Valencia. We also see it in the continuation of construction by our existing builders. In addition, the feedback we are hearing is that many homebuyers, as a result of COVID-19, are making the move to lower density communities with extensive open space and trails and closed proximity to employment and major health care facilities, thus making our communities very attractive. On the last call, we also shared with you the sale of 70 homesites in Valencia, which is reflected in our second quarter financials. The sale has reported included the portion of the purchase price payable through seller financing that comes due in December 2020. Last week, the builder chose payoff over 90% of the seller financing much earlier than the due date. Today, we closed the sale of the two buildings at the Five Point Gateway Campus. We – when we announced the sale on June 26, the Orange County Business Journal reported that this sale was a new high in terms of price per square foot at $537 per square foot versus previous highs in the $400 per square foot. Similar to other transactions, we retained the right to repurchase the buildings, if the buyer decides to exit in the future. If you recall, that’s how we repurchased the campus from Broadcom. Our vision of building fully integrated multi-generational communities with world-class sports and entertainment amenities as well as excellent public schools has not only attracted home buyers but now investors and users of commercial space, all of whom can see the accretion and value that is created by the synergy of the live, work, play, learn and connect elements. Previously, I mentioned that I have been asked to serve on the government’s task force on business and job recovery. I am serving as a co-Chair of the Finance and Infrastructure Committee and can tell you that housing has been identified as a top priority as the lack of housing supply in our markets has not changed anything, has only gotten as a result of COVID-19. This month, we launched our new website at fivepoint.com. If you have time at home, we encourage you to explore the site. It is a good tool to understand the company’s strategy and its approach to community building. Finally, I hope that you stay healthy and the positive trend we are seeing continues. Until the visibility on the road I had this clearly, we will keep one foot on the accelerator and one foot on the brakes. Thank you.

Thank you, Emile. This is Erik on. Our 10-Q was submitted on August 11 and 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 our four segments and conclude with comments about our balance sheet and liquidity position. The company’s consolidated revenues for the second quarter totaled $24.3 million and primarily consisted of a land sale at Valencia generating $17 million and recognition of revenue generated from management services. We recognized $23.9 million in earnings from our two joint ventures, including earnings of $28 million from our 75% interest in the Gateway Commercial Venture. Total consolidated costs and expenses were approximately $34.3 million, including $11.9 million in cost of sales related to the land sale at Valencia, and $16.3 million of selling, general and administrative expenses for the quarter. Net income for the quarter was approximately $14.2 million of which $7.6 million was allocated to the non-controlling interests, leaving $6.6 million attributable to the company. Moving to the segments. The Valencia segment is consolidated for accounting purposes. Revenues for the Valencia segment was $17.9 million, primarily related to the closing of 70 homesites during the quarter for a base purchase price of $16.6 million. The sale generated a 30% gross margin, and we’re structured with a 10% cash payment and a $14.9 million note due in December of 2020. As Emile mentioned, and that was reduced by approximately $13.9 million during the third quarter, prior to the maturity date. The Valencia segment income for the quarter was $1.7 million. The San Francisco segment is also consolidated for accounting purposes. The San Francisco segment’s net loss for the quarter was $2.5 million which was primarily SG&A expenses. The Great Park segment includes 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 as the venture’s historical basis of accounting. The Great Park Venture is soft funding operation with no debt. The Great Park segment revenues were $6.8 million in the second quarter, consistent primarily of revenue recognized under the management agreement. The second quarter net loss for the Great Park segment totaled $10.2 million, consisting of $1.8 million of net income related to the management company and a loss of $12 million to the Great Park Venture operations. The company recognized a loss of $4.1 million on its investment in the Great Park Venture, which includes our share of the Great Park Venture’s loss. 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. For segment reporting, we include the full results of the Gateway Commercial Venture as the venture’s historical basis of accounting. The commercial segment income was $37.4 million for the quarter, primarily related to the sale of 11 acres and 189,000 square foot building to City of Hope. The real estate was sold for $108 million. The company recognized approximately $28 million of income on its investment in the Gateway Commercial Venture. The Gateway Commercial Venture made a $75 million cash distribution to its members during the quarter of which Five Point’s 75% share was $56.3 million. As Emile mentioned, today the Gateway Commercial Venture sold two buildings currently occupied by Broadcom for $355 million. We expect the venture to make cash distribution of approximately $100 million in connection with the sale, upwards of 75% will be the distributed to Five Point. When combining this sale with the City of Hope and excess entitlement sale, the venture has generated approximately $481 million, compared to the ventures $443 million acquisition price in 2017. The venture and its members have recovered the initial investment and the venture still owns one of the four buildings on the campus and development rights for future expansion. I’ll wrap it up with a few comments related to our balance sheet and our liquidity position. As of June 30, 2020, total liquidity was approximately $339.7 million, which was comprised of cash and cash equivalents totaling $215 million and borrowing capacity of $124.7 million under our unsecured revolving line of credit. Our balance sheet is solid with a debt to total capital ratio of 25.4%. With that, I’ll turn it back to the operator. We’ll now open it up for questions.

[Operator Instructions] Our first question will come from Alan Ratner with Zelman & Associates.

Hey guys. Good afternoon. Great to hear you guys, you’re all doing well and congrats on all the progress, especially on the commercial side in this quarter. First question on Valencia, I believe last quarter, you mentioned that you guys kind of were halting the land development, but still had about 500 lots that were either developed or pretty close to fully developed that you could sell up demand pick back up. And it certainly seems like it has. So just curious if you can give us an update is development activity back on in Valencia and do you expect to sell those 500 lots by year end?

Hey, Alan, I’m glad to hear you as well. And thank you for your good wish. Let me just make sure that I think we have numbers that might be mixed up. We have a little bit of a 1,000 on sites to be – accurately 1,038 homesites in the first phase that we did the land development further. Now I think the 500 you were referencing was what I was guiding in 2019 as a potential number of homesites. If you recall, the demand was higher than we expected. And we ended up actually selling 781 homesites, and that left us with 257 homesites in terms of spending in between. I think the last time when we had the call and I talked about the fact that we have had some interest from builders notwithstanding the situation back in May. And the good news is, today, we have multiple builders, who are engaging with us, and whereas, we talked about potentially selling the 257 in inventory. Today, there’s an interest in more than 400 homesites, which means that we probably would go beyond what’s standing inventory and do some more land development to meet the demand. So those are – that’s where we are. It’s actually really doing very well. And I am happy to see that the builders are very excited to be up in Valencia. So the answer – the simple answer to the question is we are going beyond what we have in standing inventory. And we would be moving forward in some more land development once we form up lease agreements with the builders.

Got it. Yes, those numbers are matched up. I think I was just adding the 257 and I think you would given roughly another 200 or so that you mentioned you can move pretty quickly on. So I think we’re talking the same thing here but. In any case, just to clarify there, so development, if I think about just from a cash flow perspective, things should be ramping back up pretty close to where they were pre pandemic over the next quarter or two?

Well, I mean, look – I mean, no cash. We’ve been doing nothing, but keeping an eye on cash and liquidity since March 16. And as you can see, I mean, there’s some opportunities on the cash that we would not contemplating such as the closing of the deal today. It’s very hard to tell you, going project forward because we are still in a very new with market conditions. And as much as we are optimistic and we hope that things are going to stay. The four of us – the top four people are in the company every day, everybody else is removed. And we really have a finger on the pulse in this time. So I’m hoping that we will be back to the same market conditions, the same cash flows. And I think it would be a mistake for me to extrapolate today until we see a little bit more, what’s going to happen over the coming few months. Especially, as we have into an election season. And we all know that this is going to be a little bit of turbulent election.

Understood. Yes, it’ll be interesting few months for sure. And then just having Great Park, maybe you can give us a quick update just on the next phase there. I think we saw something about maybe, you guys doing some fee building relationships there, so I believe that’s new. So what’s the update there, if you can give us one?

Yes. So we are in – and thank you. We – so in terms of the sales of homesites what we do at the Great Park, and I think I went through the last time is, we measure on weekly basis the velocity of sale and the burnout of each of the different product line. And we then start to ducktail the next step – next to sale of homesites to match the timing of when the build out of a certain product that might be similar to something we’re bringing to the market. It happens. And therefore we don’t create an overlap, which then starts creating downward pressure on pricing. So we right now, in terms of homesite sales, we are not projecting any sales this year. But we were watching the velocity of sales. And as I said, we’re seeing the higher medium number of sales in the last few weeks. So if you see that the – actually the sales are accelerated, we have an ability to very quickly bring homesites online earlier than expected. In terms of the fee build, so here’s what’s happened. We go to the builders now and we have different multiple products and we tell them what our price, we ask them for is. And in some cases, something might have a little bit of a resistance to a certain price of homesites of a certain product. And we’re not going to discount our land. I mean, we’ve made it very clear that we are not going to be discounting our land. This is replace of our land. So if we find ourselves with a product that might not get the same type of appetite from builders. We will build it ourselves. And since we do not want to be a homebuilder, we have a very good relationship with the New Home Company. Larry has been a friend and knows this market extremely well. And I think as well, he becomes our key builder. He doesn’t have really the ability to buy as much as the publics’ can buy, because it’s price of land that we sell at, but this gives them an ability to be in the marketplace in the market that he knows, and gives us an ability to ultimately get the price for acre that we expect to get for a product that certain builders might not be – as has the same conviction and has really. And you probably going to see this continue even in Valencia, because when you develop 10, 15 different product lines and with the universal business sinking with the consolidation, it used to be that I used to go to 22 builders and almost every product will have somebody who would be willing to pay the price. As you know, we don’t have that number of builders today. And somebody who’s might say, I don’t like this price at the high end might be concerning me or that certain builders might test down on me. So we’re willing to do that. We believe in our own product.

I know I asked a bunch of questions, but maybe just I can hang up.

That’s okay.

Okay. I’m just curious how that might flow through your financials, when that ultimately does come to fruition, because is it just going to come in like a homebuilder, P&L revenue for the home sales? Or should we think about that differently?

No, it will come through just homes that are sold.

Got it. Okay. Perfect. Well, thanks a lot guys. Good luck with everything.

And our next question comes from Truman Patterson with Wells Fargo.

This is actually Paul Przybylski on. I guess just kind of a bookkeeping question. First of all, how many lots do you have remaining at the Great Park?

I can give you the exact number, but I’m going to say, we would probably about 4,000-ish. As we’re speaking, we are going to look up for the exact number on that. And I’m going to get somewhat into 4,000. We get you the number. If you have another question by the time, we answer back that – should have that number.

Okay. And then you mentioned, look at the cash distribution from the Gateway side, all of this quarter. What type of gain are you expecting to books from that?

So on the sale that close today, obviously, we still have to get through our accounting analysis and the transaction needs to be reviewed by our auditor. But I’d say based on the purchase price in our initial analysis, the venture that probably recognize a $70 million to $75 million gain on that sale, and then 75% of that gets pushed to Five Point.

Okay, that’s good. And then more of a theoretical question. Is that the retail entertainment office environment has changed dramatically here over the past several months. I guess, how do you – I guess, look at your, the commercial side of your business amongst the three projects and any kind of changes you might proceed in the future or the timing of bringing some commercial projects to some markets?

Well, I mean, way before COVID-19, we actually started pivoting more towards healthcare related. We mentioned uses in each of the communities actually. And in the City of Hope transaction was a great example of that. And then you’re going to see more of that’s happened. So anything I would say, healthcare is going to become more in demand both in terms of treatment, as well as research. In terms of the entertainment, obviously things out on hold right now, we have some facilities where the working with our partners of the City of Hope right now, on doing the drive in movie theater, working on activating some of the food and beverage as a delivery in outdoor. So it would be accretive as everybody else. We don’t have a big component of that. They’re just look at it as an amenity. But I can tell you, I think that it – I said before, it’d be a mistake that people do extrapolate from this moment and assume that the environment of social interaction or food and beverage and entertainment is not going to come back. In our stock, I willing to bet that once people know that divide is behind us, there’s going to be such a huge pent-up demand for people to socialize. We’re seeing it right now with people taking the risk. But if anything, be the type of entertainment elements that we do in our communities is going to become even more of a demand. But in terms of the office, right now we don’t anything on the drawing board for the office except for healthcares. And I think that we’ll see what happens in how employers and how employees and how consumers adjust their behavior as a result of this. And we’ll see it. But I, again, the young generation is telling us something loud and clear. They’re willing to take the risk because they cannot much socialize. And I think that for that generation, the line is very low between social activities and work. I think if anything, I’d think that the office spaces become more of interactive space. But again, let’s wait and see what the end of the world looks like. But for us, they’re not making any changes and we don’t have anything that we have to really be concerned about. In terms of the number of homesites, we have about – going back to your first question, we have about 4,500 homesites.

4,500, okay. And just quickly again, the observation that you gave earlier in the call, those were just for Great Park, correct? Or are you actually selling now for Valencia?

You’re talking about the medium numbers that I gave for sales?

Yes, the 10.8 and 12.

Yes. Those are for the Great Park, we have not started selling homes yet.

Okay. That’s fine. All right. Thank you. Appreciate it.

And next will be Michael Rehaut with JPMorgan. Again, go ahead, sir. Your line is open for questions.

Okay. Can you hear me now?

Yes, we can.

Hi. This is Elad Hillman on for Mike. So first, just congratulations on the sale of the two buildings at the Five Point Gateway Campus. I was wondering if you could provide some more details on the purchasers, the timing around the cash distributions and thought around any development plans for the last remaining building?

Yes. You’re coming in a little bit more, but let me just make sure that I understood the question. Your question was, you want to get a little bit more clarity on the distribution of the cash as a result of the Broadcom closing and you wanted to get a little bit more of a feel for additional development within the Five Point Gateway? Was that the question?

Yes, yes.

Okay. So for the distribution, I think it’s going to happen very quickly. I know that Erik when to expect the distribution to happen.

Probably within the next month, like 30 days.

Yes. So this is something that’s going to happen quickly. And this obviously adds to our strong liquidity, which, again, I mean, I think that every CEO in the country today, that’s the number one thing that we’re looking for is making sure that that the liquidity is in good position. In terms of the future, what we have right now, approvals for here as we have an ability to build and we can adjust the uses. We can build about 200,000 square of office or we can build about 100,000 medical. Right now, I can tell you the thinking is to build the medical. We have demand right now for all of the medical space, which will be very complementary to what we have in City of Hope. And we also plan bring back entitlements from the project, the bigger project, the Great Park and enhance Gateway as we start looking ahead. So in terms of the near future, we are starting to work right now on planning of about the 95,000 square foot facility that probably will be an outpatient surgery, spine and imaging and things like that, where we have a demand for that right now and we have users who want to be there.

Great. And my second question, I was just trying to understand a little bit better the sort of development plans and sales in Valencia for the second half of the year. You mentioned that there was interest from homebuilders for another 400 homesites. You have 257 in inventory, another 230 largely completed. So I’m just curious like why – what the hesitation is in terms of being able to potentially close more deals there in the second half of the year? Is it more just market uncertainty? Is it constraints from labor or anything else, any other thoughts around Valencia?

No, we don’t have any constraints from labor. And the thing that I think we look at is making sure that we structure a deal that is – it’s our price that we would like to see and puts the builders in a position to be comfortable as they execute to follow. And today, I mean you have builders who have more of an interest in a cash acquisition. Some builders are – have relationships with land banks. Others are looking for takedowns. Some are looking for some type of rolling option. And the good news for us is we can do any of those and those are the discussions we’re having right now with the different builders. And we’ll pick the builders that we feel optimize the value for the community and for us. So we’re not under any pressure to do anything by year-end. And all these discussions will end up being concluded based on what makes sense for the business. So in some cases, we will take somebody who might say, I’m willing to pay a cash price. In some cases, we’ll be very happy to do more of a turn type of a deal or even include some of these acquisitions in some of our relationship with land banks for us who might want to land them. So the answer is, the sacred cow for us is irreplaceable land that we’ve worked out for two decades to get here, and we are not going to go ahead and do something that discounts their plan and disrupts the pricing structure for those who have already made a commitment from the builders community to those because we were not doing any builders any service. And the good news is we have the cash and the liquidity to be able to do that.

Okay. Thank you.

Sure.

[Operator Instructions] Our next question will come from Steve Kim with Evercore ISI.

Yes. Thanks a lot guys. Appreciate all the color so far. Couple of – I got a few scattered ones here, but just generally, to start off at a higher level, Emile, you talked about the strength of the market, I believe, being fluid was the word you used. And as you didn’t want to extrapolate demand too confidently into the next few months, which is understandable. But I wanted to clarify, have you actually seen volatility in your week-to-week demand traffic, that kind of stuff? Is it – or has it been very steady and strong, but you’re just overlaying the dose of conservatism?

No, we have not seen volatility in our markets. What I have seen is a more of a psychological reaction to numbers that are coming out on the virus and people who are talking about second wave and third wave and things like that. People are talking about economy. So this is not feedback I’m getting from our builders or the buyers. This is me looking and saying, if I am a buyer and I keep on hearing from people that the economy is going to be bad or that we have a second wave, I might hesitate, and you couple that with a – we’re 2.5 months away from what appears to be a very polarized election. In a market like ours, where a lot of our buys are the specialty, and they have the ability to wait. I am very cautious about saying that because I’ve seen great five, six weeks before that, that trend might continue into the eye of the storm of what could be an overlap of the second wave with the election. I’m a very cautious about these things, and I watch them. That’s where it’s coming from, Steve.

Yes. Yes, that’s what I figured. Yes, sort of asymmetric risk when you’re a large landholder like you guys are. So I get it. That makes perfect sense. I just want to make sure it was squaring with what we were seeing because we had not seen any kind of volatility. It’s just been strong thus far. So I just wanted to clarify that. Following on, can you speak to how pricing has been progressing at Great Park? Have you seen any ability to have an upward inflection in pricing recently?

Yes. Okay, but I have – in all kinds, I have not followed carefully price move in the way. We follow it in a more stable market. It’s been more looking at what we’ve seen from the builders in terms of number of sales, the quality of the buyers and their ability to qualify and close, but we haven’t heard anything in terms of price decline, but I would – I’m going to bet that it’s probably more flattish in the last five, six weeks. I think builders are more focusing on making the sale rather than try to push supplies 3% or 4% up.

Okay. And then with respect to in Gateway, I think you – in addition to – well, let’s actually talk about 100,000 square feet of medical space that you say that can additionally be developed. I’m curious if – as we think about the high valuation you got per square foot for the more recent one, I’m curious, are there sort of trends in labs or other aspects of the health care demand such that you’re going to see a particularly strong premium for new build? Just wondering whether or not there’s just sort of some emerging trends there on the health care side such that retro fitting space is not really conducive in the same way that moving into a new space like you could offer would be?

Well, Steve, I tell you, you’ve heard me say that many, many – for many years. I think what we’re seeing and what we’re hearing is that people who are looking at office right now, whether it’s health care or whether it is R&D, are not only looking at a building. They’re looking at what else can they provide to attract talent. And that’s why we have focused for so many years on building the communities we build where today, if you’re building a medical facility over here, you have housing, you have public education, you have open space fields, everything else. I think it’s the synergy, as I said, of all these elements coming together itself driving the premium. And I think that’s what we are hearing is that when people are looking at our office building, they’re not looking at the office building. They’re looking at the community itself and the fact that they live any community that has all this access. And therefore, they can attract the talent that they want to attract.

Yes. Make perfect sense. Sure. And then lastly, I think you alluded to the fact that there was some remaining acreage. I just wanted to get some clarity around – in addition to the 100,000 square foot medical space that you can develop, is there a certain amount of acreage that could also, at some point, be subject to future development rights?

Sure. So let me just remind you that when we sold the land to Broadcom, we sold it with entitlements of 2 million square feet and the 1 million square foot was the first phase that Broadcom built with the idea that they’re going to build another 1 million square feet. And that’s when they were thinking this was going to be the headquarters. So obviously, we have the ability to build 2 million-plus square. So far, that’s only about 1 million square feet. So the answer to your question is, if we decide to intensify the land that we existed in the pipeline Gateway, we can add probably another 1 million square feet over here easily and build it here. So it’s something that we have the ability to do.

Got it. Okay. That’s very helpful. Great. I think that was what I needed. Okay, thanks a lot guys. Congrats.

Thank you, Steve. Stay healthy.

Thank you. That does conclude the question-and-answer session. I’ll now turn the conference back over to Mr. Haddad for any additional or closing remarks.

Well, I want to thank everyone for dialing in. I just want to make sure that we correct one number that we gave on the remaining number of homesites going, it tends out that I was right with 4,000 and was around with 4,500, so it’s 4,000 homesites. Just to make sure that at least the record is clear. I hope that we will have another call when everybody is healthy. And again, we are always available for any type of discussions you guys all might want to have after the call is over. So appreciate you dialing in. Please stay healthy until the next quarter. Thank you.

Well, thank you. That does conclude today’s conference. We thank you for your participation. Have a wonderful day.