Earnings Call Transcript - FPH Q4 2025

Operator, Operator

Greetings and welcome to the Five Point Holdings' Fourth Quarter and Year-End 2025 Conference Call. As a reminder, this call is being recorded. Today's call may include forward-looking statements regarding Five Point's business, financial condition, operations, cash flow, strategy, acquisitions 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 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 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 Factors section of Five Point's 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. Now I would like to turn over the call to Dan Hedigan, President and Chief Executive Officer.

Daniel Hedigan, President and CEO

Thank you, Vaughn. Good afternoon, and thank you for joining our call. I have with me today, Kim Tobler, our Chief Financial Officer, and Leo Kij, our Senior Vice President of Finance and Reporting. Stuart Miller, our Executive Chairman, and Mike Alvarado, our Chief Operating Officer and Chief Legal Officer, are joining us remotely. On today's call, I will review our fourth quarter and full year 2025 results, which marked another important milestone for Five Point. I'll discuss our operational progress during the year, highlight several major accomplishments across our communities and outline our strategic priorities as we move into 2026. Ken will then walk through our financial results in more detail and review our outlook. We'll open the line for questions following our prepared remarks. Turning first to our results. I'm very pleased to report that 2025 was another record year for Five Point despite challenging market conditions. In the fourth quarter, we generated $58.7 million in net income, resulting in annual consolidated net income of $183.5 million, exceeding our prior record set in 2024. Our net income for the year exceeded the revised guidance we issued in Q2 2025 by roughly $6 million, reflecting our team's expertise and consistent execution across our platform, disciplined capital management and continued pricing strength at the Great Park. Beyond our strong financial results, we also obtained critical entitlement approvals during the fourth quarter at both Valencia and the Great Park. I'll provide additional detail later in the community updates. These entitlements will enhance our near-term cash flows by creating a foundation for the company's future development. It goes without saying that we could not have hit these operational and financial milestones over the past few years without the dedicated and focused efforts of our small and efficient hard-working team. During the three months ended December 31, 2025, we were able to close meaningful land sales of both of our active communities. In Valencia, we closed an industrial land sale consisting of 13.8 acres for a purchase price of $42.5 million. At the Great Park, the venture closed three new home programs with 187 homesites on 19.7 acres for an aggregate base purchase price of $181.5 million. As a result of Great Park operations during the quarter, we received $73.6 million in distributions and incentive compensation payments from the Great Park Venture. Let me now talk about the market. 2025 unfolded against a housing market that remained challenging, shaped by economic uncertainty, elevated interest rates and affordability constraints. Even so, our results underscore the resilience of our assets, which in part derived from the consequences of operating in supply-constrained California markets. At the Great Park, homebuyer and builder demand remained strong throughout the year, allowing us to close the sales on 13 different programs consisting of 920 homesites while maintaining pricing discipline. In Valencia, although home sales volumes were more modest and we chose to delay residential land sales to our guest builders, the long-term value of the asset was significantly enhanced by securing major entitlement approvals that will support the next phase of our residential and industrial development activity. As a number of public homebuilders have recently noted, homebuyer demand nationally has continued to be tempered by ongoing affordability headwinds. We have seen this impact more in Valencia than in the Great Park, but we believe that demand will continue to be supported by the persistent undersupply of housing in our core markets. As we look ahead, we expect that despite intermittent challenges from interest rates or other factors that affect consumer sentiment, we should see growing buyer confidence and moderating interest rates translate into improving demand for well-located homesites. Against this backdrop, in 2025, we significantly strengthened our company. From a financial perspective, during the year, we materially enhanced our balance sheet and capital structure. We refinanced our senior notes, issuing $450 million of 8% notes due October 2030 and repaying another $75 million, which will reduce our annual interest expense by approximately $20 million. Since January 2024, we have paid down a total of $175 million in debt. Additionally, we expanded and extended our revolving credit facility to $217.5 million with a new maturity of July 2029. These actions greatly reduced our near-term refinancing risk while preserving substantial liquidity. We ended the year with cash of $425 million and total liquidity of $643 million. Importantly, our balance sheet and liquidity provide us with exceptional flexibility around capital allocation, including the ability to engage growth opportunities, which I will discuss later, as well as the ability to potentially return capital to shareholders over time. To be clear, however, our first priority is to pursue our growth strategy as we seek to expand recurring revenues. From an operating standpoint, 2025 was defined by securing critical entitlement approvals in Valencia and the Great Park, steady demand at the Great Park, continued progress on land development activities for the next phase of infrastructure at Candlestick, and the successful closing and integration of the Hearthstone land banking platform, which added a pivotal new earnings stream to our business. Before turning to community updates, I want to briefly review our operating and growth strategy, which continues to guide our decision-making. Our strategy rests on four core pillars. First, maximizing the value of our existing communities. This means aligning land sales with builder demand, pacing development appropriately and maintaining the flexibility to be patient when market conditions warrant it. Second, maintaining a lean operating structure. Even as we've grown earnings and expanded our platform, we remain disciplined in managing overhead and fixed costs. Third, matching development spending with revenue generation, ensuring capital is deployed efficiently and not too far in advance of monetization. And fourth, expanding our platform through targeted growth initiatives, most recently through the addition of Hearthstone and its short-term land banking business. Let me now provide you with some updates on our communities, starting first with the Great Park Neighborhoods. During the fourth quarter, builders in our Great Park community sold 78 homes versus 187 in Q3. This decrease in sales is primarily attributable to seasonality and reduction in available home supply as existing collections sold out. We currently have 12 actively selling programs in the Great Park Neighborhoods with 8 additional programs planned to open later this year. These current and upcoming programs will ensure our guest builders can continue delivering a wide variety of housing options throughout Great Park Neighborhoods. During the year, we closed multiple large residential land sales, many of which incorporated price participation structures designed to balance near-term certainty with long-term upside. The three programs we closed in the fourth quarter utilized this price participation model. An average base purchase price for these fourth quarter sales was $9.2 million per acre before taking into account potential price participation. These transactions spoke to our ability to adapt structure without sacrificing value. We currently are in the bidding process with builders for four new residential programs totaling approximately 27 acres. We expect to complete the bidding process and close these land sales by the end of this year. Importantly, we also received approval from the City Council for new entitlements that will allow us to convert approximately 100 acres of commercial land into additional market rate homesites, further advancing the value of this community. Next, I'll move to Valencia, our other active community. Valencia is still in the early stages of its development and has many future phases of land delivery ahead of it, which will enable us to provide much-needed housing in the Los Angeles market. Home sales showed improvement during the quarter as our guest builders sold 70 new homes versus 50 in Q3. During the fourth quarter, two programs sold out in Valencia, and we now have 10 builder programs open and actively selling. Additionally, we anticipate six new programs will open during 2026, offering prospective homebuyers additional home product options. As I mentioned, we closed our first significant industrial land sale in over 15 years at Valencia during the fourth quarter, consisting of 13.8 acres for a purchase price of $42.5 million. In order to optimize land values, we elected to delay residential land sales in 2025. We are currently talking to our guest builders about potential land sales in 2026. Although we did not complete any residential land sales, 2025 was a transformational year for Valencia as we received unanimous approval from the Los Angeles County Board of Supervisors for the Entrada South and Valencia Commerce Center entitlements. Like California and Valencia, in particular, have a long history of land use litigation, challenging new housing projects, which unfortunately, we've had to build into our business planning, we're happy to report that no litigation was filed to challenge the approval of these communities, an outcome that will allow us to accelerate our development timeline. Entrada South is expected to consist of approximately 120 net acres of residential land, over 1,300 market rate homesites, and approximately 40 net acres of commercial land, while Valencia Commerce Center is expected to include approximately 110 net acres and will cater towards industrial-focused uses. We're also pursuing approvals for three additional villages. When approved, these villages, combined with existing entitlements will provide over 10,000 entitled homesites, creating a deep pipeline for future land sales to help meet demand in the county's chronically undersupplied housing market. These approvals will substantially enhance the long-term value of Valencia and will position it to become an increasingly meaningful contributor to our results. Turning to San Francisco, we're finalizing engineering for the next phase of infrastructure and we're working with local agencies and ministerial infrastructure permits for the initial site work. We still expect to begin this initial site work at Candlestick in the first half of 2026. Now let me discuss Hearthstone. We closed the acquisition in Q3 of 2025 and the Five Point and Hearthstone teams hit the ground running. I want to reiterate how excited we are to have this incredible talented and experienced group from Hearthstone as part of Five Point. At closing, Hearthstone had approximately $2.6 billion of assets under management and that figure has since grown to approximately $3.4 billion. Additionally, we anticipate securing $300 million to $500 million of newly originated capital commitments in the first quarter. In 2025, Hearthstone contributed $11.8 million of management fee revenue and $3.5 million of net income to Five Point's consolidated results. Beyond the near-term financial contribution, Hearthstone considerably expands our relationship with institutional capital partners and builders and provides a scalable platform for fee-based earnings growth. With Hearthstone, Five Point now participates in both long-duration master planned community development and shorter duration land banking, creating a more balanced and diversified earnings profile. Now that we are well into the process of integrating Hearthstone, we're exploring additional revenue growth options available to Five Point. We're currently evaluating middle-duration opportunities in the land ecosystem in order to grow a durable platform for the future. While I can't provide further information at this juncture, our management team is focused on leveraging our experience, balance sheet and capital relationships to pursue opportunities utilizing outside capital partners to create additional fee-based revenue streams using an asset-light approach. We expect to have more to report on these initiatives on future calls. Before I wrap up, let me provide an outlook for 2026. Based on what we have seen today, we expect consolidated net income in 2026 to be approximately $100 million. We expect our earnings will be weighted more heavily towards the second half of the year as land sales and fee-based income accelerate. The volume and timing of our planned land sales are largely a reflection of our strategy of matching sales to absorption of homes in our communities in order to optimize land value. Let me conclude by saying how proud I am of what our team accomplished in 2025. We delivered record earnings, strengthened our balance sheet, advanced major entitlements, and expanded our platform in a meaningful way, all while maintaining a disciplined and patient approach to capital deployment. Five Point enters 2026 with exceptional liquidity, a deep pipeline of entitled land, and a broader set of tools to create value across the land development cycle. We believe this positions us well to continue delivering consistent performance and long-term value for our shareholders. With that, I'll turn it over to Kim to walk through the financial details and outlook in more depth.

Kim Tobler, Chief Financial Officer

Thank you, Dan. We concluded a difficult year on a positive note and are set to effectively market land in our existing communities, expand our Hearthstone land banking platform, and explore growth opportunities in the coming years. I will go over our fourth quarter and annual results for the fiscal year ending December 31, 2025, and then provide guidance on our expectations for 2026. In the fourth quarter, we reported a net income of $58.7 million, which includes a $42.5 million industrial land sale from our Valencia community, yielding a gross margin of 31.25%. Additionally, we generated $33 million in management services revenue, $24.6 million from our management of the Great Park Venture, and $21.2 million in incentive compensation. We also accounted for $8.4 million related to Hearthstone. Our SG&A for the fourth quarter was $16 million. We recognized $44.9 million in equity earnings from our unconsolidated entities, with $44.2 million coming from the Great Park Venture. This venture's equity earnings stemmed from a net income of $128.2 million, primarily due to land sales revenue of $181.5 million in the quarter, which had a gross margin of 75.5%. We also noted $8.9 million in tax expenses. As Dan mentioned, our results for 2025 showed improvement over 2024, reflecting the benefits of our sustained focus and operational discipline over the last several years. For 2025, we reported a total net income of $183.5 million, which includes the previously mentioned fourth quarter land sale at Valencia. We also achieved $65.3 million in management services revenue, $53.5 million from managing the Great Park Venture, $40 million in incentive compensation, and $11.8 million from Hearthstone's operations during its five months of contribution. Our SG&A for 2025 reached $60.6 million, up from $51.2 million in 2024, mainly due to costs related to the Hearthstone acquisition, increased share-based awards granted in the last two years, and performance-based awards that achieved targets. We reported $203.6 million in equity earnings from unconsolidated entities, primarily consisting of $201.3 million from the Great Park Venture, which contributed to Five Point's share of net income of $584.5 million from revenues totaling $825.7 million. Additionally, we incurred $28.9 million in tax expenses. In addition to what Dan described regarding our cash and liquidity, I would like to highlight that at the end of the year, our debt to total capitalization decreased to 16.3%, compared to 9.6% at the end of 2024. Regarding our Hearthstone operations, we concluded the year with approximately $3.4 billion in assets under management, aligning with our expectations. In the fourth quarter, Hearthstone generated $8.4 million in revenue and $3 million in net income. Over the five months of 2025 that Hearthstone was part of Five Point, it generated $11.8 million in revenue and $3.9 million in net income, factoring in approximately $800,000 in intangible asset amortization related to purchase accounting. We anticipate exceeding $4 billion in assets under management before the end of 2026, with expectations for revenue and net income to grow accordingly. Last year, I shared the financial advancements that Five Point achieved since 2022, and I would like to revisit that, incorporating our 2025 results. By the end of 2022, we reported a net loss of $34.8 million and finished the year with $131.8 million in cash and $625 million in outstanding senior notes. In 2023, we posted $113.7 million in net income and ended the year with $353.8 million in cash while still having $625 million in senior notes. For 2024, our net income rose to $177.6 million, we reduced our senior notes by $100 million to a $525 million balance, and concluded with $430.9 million in cash and total liquidity of $555.9 million. This year, we report $183.5 million in net income, having further paid down our senior notes by $75 million to a balance of $450 million, and we conclude with $425.5 million in cash and total liquidity of $643 million. We are confident in the measures we have taken to enhance our financial position, along with the successes we have recently achieved with additional entitlements at the Great Park and Valencia. I would like to provide some context regarding the guidance Dan shared. At the start of 2026, we have about 155 net acres of residential land remaining at the Great Park and roughly 55 net acres of residential land, 11 net acres of retail land, and 13 net acres of industrial land available at Valencia. These figures exclude the recently approved entitlements at Entrada South and Valencia Commerce Center that Dan mentioned, from which we expect to begin seeing sales early in 2028. For 2026, we anticipate selling 20 acres of land in Valencia and 50 acres of land in the Great Park, which, combined with contributions from Hearthstone activities, is expected to yield approximately $100 million in net income for that year. We project that most of the income will occur in the second half of the year, anticipating a modest loss in the first quarter, as we do not plan to finalize land sales during that period. In conclusion, our guidance takes into account the challenging housing market, and we will maintain a disciplined approach. By aligning land sales with home absorption, we are safeguarding value, managing risk, and positioning our business for normalized demand over time. We believe this strategy effectively balances immediate caution with long-term opportunity. Now, I will turn it back to the operator to open the floor to questions.

Operator, Operator

Our first question comes from Alan Ratner with Zelman & Associates.

Alan Ratner, Analyst

Congrats on all the progress in 2025, really impressive results in a tough market, tough housing market, at least. So a lot to run through. I guess just thinking about '26, and I appreciate the guidance there, especially on the revenue and the income generation. I'm just curious when you think of your...

Kim Tobler, Chief Financial Officer

Alan, we lost you. Can you repeat the question?

Alan Ratner, Analyst

Can you hear me okay? Can you hear me now guys?

Kim Tobler, Chief Financial Officer

We couldn't hear Alan.

Alan Ratner, Analyst

I can hear the speakers. Can you hear me?

Kim Tobler, Chief Financial Officer

We hear you now, Alan.

Alan Ratner, Analyst

Okay. Sorry about that. I don't know what happened. So I will start over. And first off, just congratulating you guys on all the great progress you made in '25. So what I was hoping to get, and I appreciate the guidance on the income drivers for '26. When you look, I guess, specifically at the two wholly owned projects, Valencia and San Francisco, I was hoping you could walk through a little bit what the expectation is for development expenditures in '26 and beyond. I know you mentioned the new entitlements on Valencia. So curious if we should expect to see a ramp in development spending there. And in San Francisco as well, if you can kind of quantify the ramp there now that you're expecting to begin some work there.

Kim Tobler, Chief Financial Officer

Thanks, Alan. Just as it relates to San Francisco, we're in the process of permitting right now, which is requiring a great deal of capital. And we also have permitting that's going to be done at Valencia as well. What I'd suggest you use is for both of those projects, about the same as the capital we spent in the current year, which is about $125 million. So that will be spread between the projects and continue at that pace. We're trying to keep that pace constant as we increase the development in both places.

Alan Ratner, Analyst

Got it. That's helpful. I just want to confirm my understanding of the entitlement approvals you received. You mentioned the Valencia project, and I believe there are also approvals related to Great Park. Is this additional to the acreage you previously disclosed as remaining for sale in Great Park, or is it included in the main...

Daniel Hedigan, President and CEO

Alan, Dan here. Can you hear me?

Alan Ratner, Analyst

I can. Yes. I can hear you.

Operator, Operator

Alan says he can hear you.

Daniel Hedigan, President and CEO

Alan, can you hear me?

Alan Ratner, Analyst

Yes. I am.

Daniel Hedigan, President and CEO

We're having a little audio issue here. Regarding your question about Great Park, I believe I caught most of it. We've previously discussed that we have 100 acres designated for commercial use. However, we've collaborated with the city since these sites were also part of their RHNA plan, which means they were identified for RHNA units. We have worked to convert that commercial land to residential use, so I think you’re asking if this is an addition to what we had disclosed earlier.

Alan Ratner, Analyst

Got it. So it was 100 acres and now you're up to what you said 150 based on this new approval?

Daniel Hedigan, President and CEO

I'm sorry, I missed part of that, Alan.

Alan Ratner, Analyst

You were at 100 acres and now with this RHNA approval, you're at 150. Is that correct?

Daniel Hedigan, President and CEO

No, I'm sorry, yes. So what that means is we have existing residential land that remains untransacted. We still have additional original entitlement. The 100 acres are in addition to that. And so Kim...

Kim Tobler, Chief Financial Officer

Alan, just to be clear, we have 155 acres left at the Great Park. The 55 were already residential. And that's what was left of the residential that we were working our way through. The 100 was commercial land that has now been redesignated as residential as a result of the entitlements.

Operator, Operator

There are no further questions at this time. That concludes our question-and-answer session. I would like to turn the floor back over to Dan Hedigan for closing comments.

Daniel Hedigan, President and CEO

Well, first, I apologize for that audio problem we're having. So I appreciate everyone's patience. On behalf of our management team, we thank you for joining us on today's call, and we look forward to speaking with you next quarter.

Operator, Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. Please disconnect your lines and have a wonderful day.