Earnings Call Transcript - FPH Q1 2024

Operator, Operator

Greetings, and welcome to the Five Point Holdings, LLC First Quarter 2024 Conference Call. As a reminder, this call is being recorded. Today's call may include forward-looking statements regarding Five Point's business, financial conditions, 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 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 the call over to Dan Hedigan, Chief Executive Officer.

Dan Hedigan, CEO

Thank you. Good afternoon, and thank you for joining our call. I have with me today Kim Tobler, our Chief Financial Officer; Mike Alvarado, our Chief Operating Officer and Chief Legal Officer; and Leo Kij, our Senior Vice President of Finance and Reporting. Stuart Miller, our Executive Chairman, is joining us remotely. On today's call, I'll update you on our Q1 results, on our team's focus during the quarter and the steps we are taking to implement our strategic priorities. Next, Kim will give an overview of the company's financial performance and condition with some limited guidance for the second quarter and the full year. We will then open the line for questions to our management team. So let's begin. I am very pleased to report another strong quarterly performance for Five Point as we continue to focus on fortifying our balance sheet, controlling our expenses and carefully managing our capital spend to match near-term revenues. Accordingly, we're happy to report a profitable first quarter, consistent with our expectations as we started the year. Our net income for the quarter was $6.1 million, which reflects the strength of the builder interest in our two active communities. Specifically, in February, we sold 11.6 acres of land at the Great Park for $6.4 million per acre for a total sales price of $74.6 million with a 60% profit margin. This sale contributed to the $17.7 million of equity and earnings from unconsolidated investments for the quarter. Additionally, consistent with our focus on holding down costs, we held our SG&A to $12.9 million, which is 6.5% less than the first quarter of last year. We achieved these results while there remains uncertainty around interest rates and inflation. We've been managing our business with the assumption that interest rates remain elevated for longer than originally anticipated. While interest rates are relevant in our chronically undersupplied California market, shortages of entitled land and existing home inventory continue to drive strong demand from builders. Moving to our balance sheet. In connection with the highly successful exchange of our senior notes, we paid down our debt by $100 million, resulting in an improved debt to total capitalization ratio of 20.9%. We ended the quarter in a healthy liquidity position with $233 million in cash and $0 drawn on our $125 million revolver, giving us total liquidity of $358 million. Kim will cover more details regarding our financials during his comments. Further validating our consistent progress, I'm happy to report that S&P Global has raised our issuer credit rating to B- and upgraded our outlook to stable. S&P also raised the ratings on our senior unsecured notes to B. These upgrades reflect the team's hard work in continuing to focus on our three main priorities: generating revenue and positive cash flow; controlling SG&A costs; and managing capital spend to match near-term revenue opportunities. Also reflecting the tremendous progress that we have made as a team, I'd like to note that Mike Alvarado has added new responsibilities as our Chief Operating Officer. The addition of these duties is a recognition of the expanded role Mike has already been playing for Five Point and a significant contribution to our overall operational and strategic progress. Mike has been intimately involved with the company's assets and operations for nearly 20 years. As an expanded role, Mike will be focused on, among other things, ensuring that we execute efficiently on our business plan and overseeing entitlement efforts across our communities. I am confident Mike will see continued success in this new role that his leadership will help drive shareholder value. Congratulations, Mike. Let me now expand a bit on general market conditions. Notwithstanding last week's economic news on inflation, conditions in our markets remain relatively strong for homebuilders. The continued lack of existing home inventory, coupled with low unemployment and fairly strong consumer confidence has helped sustain strong demand for our land and our communities. The limiting factor in demand remains affordability, which is driven in large part by the impact of higher interest rates and stubborn inflation. While interest rates have been fluctuating, builders have a variety of incentive structures to support new home sales. With the ability to adjust those incentives in response to interest rate movements, homebuilders have been uniquely able to capture and sustain demand to allow new home sales to continue. In the early months of 2024, we have seen strong builder interest in our residential land offerings, as well as sustained new home demand and we believe the demand for entitled land in our communities will continue to exceed supply. On the commercial side of our business, as we have noted before, capital markets have slowed for speculative commercial development, but we are still seeing interest from both developers and users. We're currently viewing user offers on certain commercial sites, and we expect this interest will continue to support commercial demand. The regional housing needs assessment, RHNA, process that is ongoing in California may also give us optionality to consider multi-family or for-sale housing on certain of our commercial sites. Let me now provide you with some updates on our communities, starting first with the Great Park Neighborhoods. As a reminder, the Great Park is the most mature of our communities and its ongoing contribution to our financial results reflects the benefits that we and our Great Park Venture partners are receiving from the investments made in the community in prior years. During the first quarter, builders in our Great Park community sold 69 homes. That number is lower than normal due to extremely limited inventory at Solis Park with only two remaining builder programs currently selling. Despite the limited inventory, we're encouraged by sustained interest and traffic in the community, affirming the ongoing appeal of the Great Park Neighborhoods to prospective homebuyers. We believe the builders share our sentiment as we are actively engaged with multiple builders on new land sale opportunities. Our next major neighborhood, Luna Park, opened one out of 13 planned programs at the end of 2023, and that program has already sold out. The remaining Luna builder programs are anticipated to start opening this month with openings continuing through September. As these programs open, we will once again be able to offer a wide variety of housing options in Great Park Neighborhoods. As I mentioned in my last earnings call, we anticipated two builder sales in Q1 at Great Park. The first planned home sale closed as scheduled. The second sale required the completion of some additional work before closing. Despite this closing, we split the sale into two phases, one of which already closed in Q2; we anticipate closing the second phase next month. As I mentioned earlier, there remains strong homebuilder interest in acquiring homesites at Great Park. In this quarter, we completed the bidding process for a group of six new home programs with approximately 400 homesites. We are currently finalizing contract negotiations on those home sites. We've also started the bidding process with our homebuilder partners for a sale of four new programs with approximately 300 home sites. We'll have more to report on those programs later in the year. Now, I'll move to Valencia, our other active community. Valencia is still in its early stages of development with many future phases of land delivery ahead of us, which will help address the land shortages I discussed earlier. During the first quarter, the builders sold 62 new homes. There are now only 27 homes remaining in our initial offering of 1,268 homes. In our newest Valencia development area, we now have five new homebuilder programs opened, with two more still to be opened later this year. We are seeing continued strong demand in Valencia. These new offerings will augment our current lineup, and we anticipate that these openings will result in increased home sales. The six new programs we sold at the end of last year are anticipated to open in late 2024 and early '25. Homebuilders remain engaged with us in Valencia. On the last call, we mentioned our plan to potentially convert a 35-acre site from commercial to residential use, which is permitted under our flexible zoning. We're now finalizing an agreement to sell this 35-acre mixed-use site for 179 homes with the sale anticipated to close in the fourth quarter this year. We also have three additional programs with approximately 200 home sites out to our homebuilder partners for bidding, and we expect to have more to report on those programs later in the year. Turning to San Francisco. We are continuing to work with the City and County of San Francisco to rebalance the entitlements between our two San Francisco communities, Candlestick and the Shipyard. As I've discussed before, we are seeking the rebalancing to enable the development of Candlestick as a stand-alone project. This would allow us to begin development of Candlestick without having to wait for the Navy to complete its remediation activities at the Shipyard. We are very focused on obtaining necessary approvals from various City and County agencies and are maintaining momentum to activate Candlestick as the initial phase of this larger mixed-use community located on irreplaceable land along the San Francisco Bay. Let me conclude by saying our first quarter has seen continuing progress on our three main priorities: generating revenue and positive cash flow; controlling SG&A costs; and managing capital spend to match near-term revenue opportunities. Additionally, our entire team is focused on progressing entitlements for our next neighborhoods in Valencia and in moving Candlestick forward through the rebalancing process. Our economic and geopolitical events have impacted the financial markets during the quarter; however, homebuyers in our markets continue to show interest in our communities. We believe that pent-up demand will continue to be a driving force for our land sales to builders. The underlying housing environment reflects a chronic supply shortage that is compounded by limited inventory of existing homes. Land development is a long game, and we have continuously been improving our financial condition. Our efforts today are ensuring we are well positioned within that long game by recognizing the importance of creating and maintaining shareholder value. Now let me turn it over to Kim, who will report on our financial results and will provide some limited guidance for the remainder of the year.

Kim Tobler, CFO

Thank you, Dan. We were pleased to see S&P upgrade both our issuer and instrument ratings to stable B- and B. This upgrade reflects our improved performance and S&P's understanding of our company and its assets. For the first quarter of 2024, we reported consolidated net income of $6.1 million, which included $9.9 million of revenue and $17.7 million of equity in earnings from our investment in the Great Park Venture. Of this revenue, $8.7 million was related to our management services. The equity earnings from the Great Park Venture came primarily from a sale in February of 82 home sites on 11.6 acres, with a land sales price of $74.6 million and a profit margin of 60% before closing costs, equating to $6.4 million per acre. The venture also recognized $17.6 million of profit participation from prior year land sales. Our SG&A expense was $12.9 million, down from $13.8 million the previous year, showing our focus on managing costs. We ended the quarter with $232.7 million in cash and $125 million available on a revolving credit facility, resulting in total liquidity of $357.7 million. Our debt to total capitalization improved to 20.9%. Factors that impacted our cash balance this quarter included a $100 million payment to settle our senior note exchange, $8.3 million of accrued interest, and $7.6 million in transaction costs. We received $24 million in equity distributions, with $17.7 million reflected in our statement of cash flows as a return on investment in operating activities, and we also received a $6.4 million incentive compensation payment from the Great Park Venture. Development costs totaled $17.4 million at Valencia and $1.7 million at San Francisco. The Great Park Venture is significant to our financial results. While we are selling land at both Valencia and the Great Park Venture, the Great Park Venture is a more mature community. In Valencia, we're still developing our first of nine villages, which has only 3,600 home sites of a potential 21,500. At the Great Park Venture, most major capital costs are already incurred, and our ongoing capital costs will generally be recovered through CFD reimbursements. In 2023, the Great Park Venture sold 798 home sites on 84 acres and 37.9 acres of commercial land for total revenue of $532 million. The venture recognized $21 million in profit participation and made equity distributions of $411.2 million to percentage interest holders, with Five Point receiving $154.2 million and $41.6 million in incentive compensation payments. Five Point manages the venture, overseeing daily operations and development direction. We anticipate maintaining our current pace of sales and development for the coming years. Now, for some guidance, we expect the second quarter net income to be similar to or slightly higher than the first quarter. We have already closed one sale at the Great Park this quarter and expect another before the second quarter ends. For the year, we estimate net income between $75 million and $100 million, mostly recognized in the fourth quarter, and plan to end the year with $250 million to $300 million in cash. We see positive momentum and benefits from our focus on our main priorities. I'll now turn the call back to the operator.

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from Alan Ratner with Zelman & Associates. Please go ahead with your question.

Alan Ratner, Analyst

Good afternoon, everyone. Thank you for the details shared so far. Dan, my question focuses on the recent discussions you've had with builders. It seems like you have several parcels currently being bid on. Unfortunately, three months ago we were optimistic about the rate outlook, but it appears to have worsened. With rising rates, the equity markets are starting to reflect potential risks of a slowdown. I'm interested to know if you've noticed anything in your communities, whether regarding home sales or discussions with builders, that might indicate the current market concerns or caution are starting to affect the housing sector.

Dan Hedigan, CEO

Thanks, Alan. It's always great to hear from you. As I mentioned earlier, we are really facing a chronic shortage of land, especially builder land, entitled land, and home sites. This shortage is significantly influencing our discussions and bids with builders. The demand for housing is resulting in highly competitive bids and active involvement from multiple builders for everything we are currently marketing. California is in a particularly unique situation, with virtually no new home inventory and very limited resale and entitled land. Therefore, we are not observing any downturn attributed to the current financial market. The new homebuilders are particularly well positioned to maintain sales, which is exactly what we are experiencing in the market.

Alan Ratner, Analyst

That's encouraging to hear. Regarding the Great Park sale in the quarter, the price per acre is $6.4 million, which is significantly higher than the sales recorded last year, where the average was approximately $4.3 million per acre. I recognize that this figure can vary widely. It seems there was another sale in a similar price range back in 2019, but typically, the average has been in the 5s over the past few years. Is there anything particular about this parcel that justified the premium, or do you think this reflects a general inflation trend in prices within the community right now?

Dan Hedigan, CEO

Well, one thing I've mentioned to you, I know the sale that you're reflecting back to had a unique structure. You're looking at kind of the going in price. But the coming out price, we expect to be much higher. As to this specific sale, no, it really is reflective of the market. There's nothing unique about this. It really is just what we're seeing in the market today.

Alan Ratner, Analyst

Got it. So as we think about the next two deals you've got under contract, obviously, it's going to be maybe a little volatile, but something in the current range, I guess, is where we should think about the future sales coming in at.

Dan Hedigan, CEO

Yes, absolutely.

Alan Ratner, Analyst

Right. Okay. Appreciate that. Thank you very much.

Dan Hedigan, CEO

Thanks, Alan.

Operator, Operator

Our next question comes from the line of Myron Kaplan, a Private Investor. Please proceed with your question.