FPH 10-Q
Five Point Holdings, LLC (FPH)
10-Q
2022-08-04
For: 2022-06-30
View Original
Added on
April 04, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
For the quarterly period ended June 30, 2022
OR
For the transition period from to
Commission File Number 001-38088
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||||||||
(Address of Principal Executive Offices) | (Zip code) | ||||||||||||||||
(949 ) 349-1000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | ☒ | ||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 31, 2022, 69,068,354 Class A common shares and 79,233,544 Class B common shares were outstanding.
FIVE POINT HOLDINGS, LLC
TABLE OF CONTENTS
FORM 10-Q
Page | ||||||||
PART I. FINANCIAL INFORMATION | ||||||||
ITEM 1. | ||||||||
ITEM 2. | ||||||||
ITEM 3. | ||||||||
ITEM 4. | ||||||||
PART II. OTHER INFORMATION | ||||||||
ITEM 1. | ||||||||
ITEM 1A. | ||||||||
ITEM 2. | ||||||||
ITEM 3. | ||||||||
ITEM 4. | ||||||||
ITEM 5. | ||||||||
ITEM 6. | ||||||||
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are subject to risks and uncertainties. These statements concern expectations, beliefs, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “would,” “result” and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements. This report may contain forward-looking statements regarding: our expectations of our future revenues, costs and financial performance; future demographics and market conditions in the areas where our communities are located; the outcome of pending litigation and its effect on our operations; the timing of our development activities; and the timing of future real estate purchases or sales, including anticipated deliveries of homesites and anticipated amenities in our communities.
We caution you that any forward-looking statements presented in this report are based on our current views and information currently available to us. Forward-looking statements are subject to risks, trends, uncertainties and factors that are beyond our control. We believe these risks and uncertainties include, but are not limited to, the following:
•uncertainties and risks related to public health issues such as a major epidemic or pandemic, including COVID-19;
•risks associated with the real estate industry;
•downturns in economic conditions or demographic changes at the national, regional or local levels, particularly in the areas where our properties are located;
•uncertainty and risks related to zoning and land use laws and regulations, including environmental planning and protection laws;
•risks associated with development and construction projects;
•adverse developments in the economic, political, competitive or regulatory climate of California;
•loss of key personnel;
•uncertainties and risks related to adverse weather conditions, natural disasters and climate change;
•fluctuations in interest rates;
•the availability of cash for distribution and debt service and exposure to risk of default under debt obligations;
•exposure to liability relating to environmental and health and safety matters;
•exposure to litigation or other claims;
•insufficient amounts of insurance or exposure to events that are either uninsured or underinsured;
•intense competition in the real estate market and our ability to sell properties at desirable prices;
•fluctuations in real estate values;
•changes in property taxes;
•risks associated with our trademarks, trade names and service marks;
•conflicts of interest with our directors;
•general volatility of the capital and credit markets and the price of our Class A common shares; and
•risks associated with public or private financing or the unavailability thereof.
Please see Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as well as other risks and uncertainties detailed from time to time in our subsequent Quarterly Reports on Form 10-Q and other filings with the Securities and Exchange Commission, for a more detailed discussion of these and other risks.
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you therefore against relying on any of these forward-looking statements.
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. They are based on estimates and assumptions only as of the date of this report. We undertake no obligation to update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by applicable law.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except shares)
(Unaudited)
| June 30, 2022 | December 31, 2021 | ||||||||||
ASSETS | |||||||||||
INVENTORIES | $ | $ | |||||||||
INVESTMENT IN UNCONSOLIDATED ENTITIES | |||||||||||
PROPERTIES AND EQUIPMENT, NET | |||||||||||
INTANGIBLE ASSET, NET—RELATED PARTY | |||||||||||
CASH AND CASH EQUIVALENTS | |||||||||||
RESTRICTED CASH AND CERTIFICATES OF DEPOSIT | |||||||||||
RELATED PARTY ASSETS | |||||||||||
OTHER ASSETS | |||||||||||
TOTAL | $ | $ | |||||||||
LIABILITIES AND CAPITAL | |||||||||||
LIABILITIES: | |||||||||||
Notes payable, net | $ | $ | |||||||||
Accounts payable and other liabilities | |||||||||||
Related party liabilities | |||||||||||
Deferred income tax liability, net | |||||||||||
Payable pursuant to tax receivable agreement | |||||||||||
Total liabilities | |||||||||||
| COMMITMENTS AND CONTINGENT LIABILITIES (Note 11) | |||||||||||
REDEEMABLE NONCONTROLLING INTEREST | |||||||||||
CAPITAL: | |||||||||||
Class A common shares; No par value; Issued and outstanding: June 30, 2022— | |||||||||||
Class B common shares; No par value; Issued and outstanding: June 30, 2022— | |||||||||||
Contributed capital | |||||||||||
Retained earnings | |||||||||||
Accumulated other comprehensive loss | ( | ( | |||||||||
Total members’ capital | |||||||||||
Noncontrolling interests | |||||||||||
Total capital | |||||||||||
TOTAL | $ | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
1
FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
REVENUES: | |||||||||||||||||||||||
Land sales | $ | $ | $ | $ | |||||||||||||||||||
Land sales—related party | |||||||||||||||||||||||
Management services—related party | |||||||||||||||||||||||
Operating properties | |||||||||||||||||||||||
Total revenues | |||||||||||||||||||||||
COSTS AND EXPENSES: | |||||||||||||||||||||||
Land sales | |||||||||||||||||||||||
Management services | |||||||||||||||||||||||
Operating properties | |||||||||||||||||||||||
Selling, general, and administrative | |||||||||||||||||||||||
| Restructuring | |||||||||||||||||||||||
Total costs and expenses | |||||||||||||||||||||||
OTHER INCOME: | |||||||||||||||||||||||
Interest income | |||||||||||||||||||||||
Miscellaneous | |||||||||||||||||||||||
Total other income | |||||||||||||||||||||||
| EQUITY IN EARNINGS (LOSS) FROM UNCONSOLIDATED ENTITIES | ( | ||||||||||||||||||||||
| LOSS BEFORE INCOME TAX PROVISION | ( | ( | ( | ( | |||||||||||||||||||
| INCOME TAX PROVISION | ( | ( | ( | ( | |||||||||||||||||||
| NET LOSS | ( | ( | ( | ( | |||||||||||||||||||
| LESS NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | ( | ( | ( | ( | |||||||||||||||||||
| NET LOSS ATTRIBUTABLE TO THE COMPANY | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| NET LOSS ATTRIBUTABLE TO THE COMPANY PER CLASS A SHARE | |||||||||||||||||||||||
| Basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
WEIGHTED AVERAGE CLASS A SHARES OUTSTANDING | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
Diluted | |||||||||||||||||||||||
| NET LOSS ATTRIBUTABLE TO THE COMPANY PER CLASS B SHARE | |||||||||||||||||||||||
Basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
WEIGHTED AVERAGE CLASS B SHARES OUTSTANDING | |||||||||||||||||||||||
| Basic and diluted | |||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| NET LOSS | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
OTHER COMPREHENSIVE INCOME: | |||||||||||||||||||||||
| Reclassification of actuarial loss on defined benefit pension plan included in net loss | |||||||||||||||||||||||
Other comprehensive income before taxes | |||||||||||||||||||||||
INCOME TAX PROVISION RELATED TO OTHER COMPREHENSIVE INCOME | |||||||||||||||||||||||
OTHER COMPREHENSIVE INCOME—Net of tax | |||||||||||||||||||||||
| COMPREHENSIVE LOSS | ( | ( | ( | ( | |||||||||||||||||||
| LESS COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | ( | ( | ( | ( | |||||||||||||||||||
| COMPREHENSIVE LOSS ATTRIBUTABLE TO THE COMPANY | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL
(In thousands, except share amounts)
(Unaudited)
| Class A Common Shares | Class B Common Shares | Contributed Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Members’ Capital | Noncontrolling Interests | Total Capital | ||||||||||||||||||||||||||||||||||||||||
| BALANCE - March 31, 2022 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income—net of tax of $ | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| BALANCE - June 30, 2022 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| BALANCE - March 31, 2021 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income—net of tax of $ | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Tax distributions to noncontrolling interests | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| BALANCE - June 30, 2021 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL
(In thousands, except share amounts)
(Unaudited)
| Class A Common Shares | Class B Common Shares | Contributed Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Members’ Capital | Noncontrolling Interests | Total Capital | ||||||||||||||||||||||||||||||||||||||||
| BALANCE - December 31, 2021 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | ( | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Reacquisition of share-based compensation awards for tax-withholding purposes | ( | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Forfeitures of share-based compensation awards, net of issuances | ( | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income—net of tax of $ | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Tax distributions to noncontrolling interests | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
Adjustment to liability recognized under tax receivable agreement—net of tax of $ | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Adjustment of noncontrolling interest in the Operating Company | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| BALANCE - June 30, 2022 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| BALANCE - December 31, 2020 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Reacquisition of share-based compensation awards for tax-withholding purposes | ( | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
Issuance of share-based compensation awards, net of forfeitures | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Other comprehensive income—net of tax of $ | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Tax distributions to noncontrolling interests | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
Adjustment to liability recognized under tax receivable agreement—net of tax of $ | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Adjustment of noncontrolling interest in the Operating Company | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| BALANCE - June 30, 2021 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Equity in loss (earnings) from unconsolidated entities | ( | ||||||||||
| Depreciation and amortization | |||||||||||
| Gain on distribution from indirect Legacy Interest in Great Park Venture—related party | ( | ||||||||||
| Share-based compensation | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Inventories | ( | ( | |||||||||
| Related party assets | |||||||||||
| Other assets | ( | ||||||||||
| Accounts payable and other liabilities | ( | ||||||||||
| Related party liabilities | ( | ||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Return of investment from Great Park Venture | |||||||||||
| Return of investment from Valencia Landbank Venture | |||||||||||
| Contribution to Valencia Landbank Venture | ( | ||||||||||
| Distribution from indirect Legacy Interest in Great Park Venture—related party | |||||||||||
| Purchase of properties and equipment | ( | ( | |||||||||
| Net cash provided by investing activities | |||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Payment of financing costs | ( | ||||||||||
| Related party reimbursement obligation | ( | ( | |||||||||
| Reacquisition of share-based compensation awards for tax-withholding purposes | ( | ( | |||||||||
| Tax distributions to noncontrolling interests | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | ( | ( | |||||||||
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—Beginning of period | |||||||||||
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—End of period | $ | $ | |||||||||
SUPPLEMENTAL CASH FLOW INFORMATION (Note 12)
See accompanying notes to unaudited condensed consolidated financial statements.
6
FIVE POINT HOLDINGS, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BUSINESS AND ORGANIZATION
Five Point Holdings, LLC, a Delaware limited liability company (the “Holding Company” and, together with its consolidated subsidiaries, the “Company”), is an owner and developer of mixed-use planned communities in California. The Holding Company owns all of its assets and conducts all of its operations through Five Point Operating Company, LP, a Delaware limited partnership (the “Operating Company”), and its subsidiaries.
The Company has two classes of shares outstanding: Class A common shares and Class B common shares. Holders of Class A common shares and holders of Class B common shares are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders, and are both entitled to receive distributions at the same time. However, the distributions paid to holders of Class B common shares are in an amount per share equal to 0.0003 multiplied by the amount paid per Class A common share.
The Company presents noncontrolling interests on the Company’s condensed consolidated balance sheet and classifies such interests within capital but separate from the Company’s Class A and Class B members’ capital. Noncontrolling interests represent equity interests in the Company’s consolidated subsidiaries held by partners in the Operating Company, excluding the Holding Company, and members in The Shipyard Communities, LLC (the “San Francisco Venture”), excluding the Operating Company (see Note 5).
The Company has an entity structure in which the Company’s two largest equity owners, Lennar Corporation (“Lennar”) and Castlelake, LP (“Castlelake”), and the Company’s founder and Chairman Emeritus, Emile Haddad, separately hold, in addition to interests in the Company’s common shares, equity interests in either or both the Operating Company or the San Francisco Venture that can be exchanged for, at the Company’s option, either the Company’s Class A common shares or cash. The diagram below presents a simplified depiction of the Company’s organizational structure as of June 30, 2022:
(1) A wholly owned subsidiary of the Holding Company serves as the sole managing general partner of the Operating Company. As of June 30, 2022, the Company owned approximately 62.5 % of the outstanding Class A Common Units of the Operating Company. After a one year holding period, a holder of Class A Common Units of the Operating Company can exchange the units for, at the Company’s option, either Class A common shares of the Holding Company, on a one -for-one basis, or cash equal to the fair market value of such shares. Until Class A Common Units of the Operating Company are exchanged or redeemed, the capital associated with Class A Common Units of the Operating Company not held by the Holding Company is presented within "noncontrolling interests" on the Company’s condensed consolidated balance sheet. Assuming the exchange of all outstanding Class A Common Units of the Operating Company and all outstanding Class A units of the San Francisco Venture (see (2)
7
below), that are not held by the Company, based on the closing price of the Company’s Class A common shares on July 29, 2022 ($4.22 ), the equity market capitalization of the Company was approximately $625.9 million.
(2) The Operating Company owns all of the outstanding Class B units of the San Francisco Venture, the entity developing the Candlestick and The San Francisco Shipyard communities. The Class A units of the San Francisco Venture, which the Operating Company does not own, are intended to be economically equivalent to Class A Common Units of the Operating Company. As the holder of all outstanding Class B units of the San Francisco Venture, the Operating Company is entitled to receive 99 % of available cash from the San Francisco Venture after the holders of Class A units in the San Francisco Venture have received distributions equivalent to the distributions, if any, paid on Class A Common Units of the Operating Company. Class A units of the San Francisco Venture can be exchanged, on a one -for-one basis, for Class A Common Units of the Operating Company (See Note 5). Until exchanged or redeemed through the Operating Company, the capital associated with Class A units of the San Francisco Venture is presented within "noncontrolling interests" on the Company’s condensed consolidated balance sheet.
(3) Together, the Operating Company, Five Point Communities, LP, a Delaware limited partnership (“FP LP”), and Five Point Communities Management, Inc., a Delaware corporation (“FP Inc.” and together with FP LP, the “Management Company”) own 100 % of Five Point Land, LLC, a Delaware limited liability company (“FPL”), the entity developing Valencia, a mixed-use planned community located in northern Los Angeles County, California. The Operating Company has a controlling interest in the Management Company.
(4) Interests in Heritage Fields LLC, a Delaware limited liability company (the “Great Park Venture”), are either “Percentage Interests” or “Legacy Interests.” Holders of the Legacy Interests were entitled to receive priority distributions up to an aggregate amount of $565.0 million, of which $482.3 million had been distributed as of July 31, 2022 (See Note 4). The Company owns a 37.5 % Percentage Interest in the Great Park Venture and serves as its administrative member. However, management of the Great Park Venture is vested in the four voting members, who have a total of five votes. Major decisions generally require the approval of at least 75 % of the votes of the voting members. The Company has two votes, and the other three voting members each have one vote, so the Company is unable to approve any major decision without the consent or approval of at least two of the other voting members. The Company does not include the Great Park Venture as a consolidated subsidiary, but rather as an equity method investee, in its condensed consolidated financial statements.
(5) The Company owns a 75 % interest in Five Point Office Venture Holdings I, LLC, a Delaware limited liability company (the “Gateway Commercial Venture”). The Company manages the Gateway Commercial Venture, however, the manager’s authority is limited. Major decisions by the Gateway Commercial Venture generally require unanimous approval by an executive committee composed of two people designated by the Company and two people designated by another investor. Some decisions require approval by all of the members of the Gateway Commercial Venture. The Company does not include the Gateway Commercial Venture as a consolidated subsidiary, but rather as an equity method investee, in its condensed consolidated financial statements.
2. BASIS OF PRESENTATION
On February 9, 2022, Daniel Hedigan was appointed as the Company’s Chief Executive Officer. Preceding Mr. Hedigan’s appointment, Emile Haddad stepped down from his roles as Chairman, Chief Executive Officer and President effective as of September 30, 2021 and transitioned into a senior advisory role pursuant to a three-year advisory agreement. Mr. Haddad remains a
8
member of the Board of Directors serving as Chairman Emeritus. Concurrent with Mr. Hedigan’s appointment, Lynn Jochim transitioned from her position as President and Chief Operating Officer into an advisory role pursuant to a three-year advisory agreement (see Note 8). Upon the appointment of Mr. Hedigan as the Company’s Chief Executive Officer, the Company accrued a related party liability of $15.6 million attributed to advisory agreement payments due to Mr. Haddad and Ms. Jochim. In addition, the Company determined the service condition associated with Mr. Haddad and Ms. Jochim’s unvested restricted share awards had been modified (see Note 14). As a result of this modification, the Company recognized approximately $3.0 million in share-based compensation expense as a restructuring cost during the six months ended June 30, 2022.
In addition to the Company’s executive management restructuring activities, the Company incurred and paid $0.9 million in restructuring costs resulting from severance benefits from layoffs that occurred in March 2022.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net periodic pension benefit | $ | $ | $ | $ | |||||||||||||||||||
Other—related party | |||||||||||||||||||||||
| Total miscellaneous other income | $ | $ | $ | $ | |||||||||||||||||||
9
3. REVENUES
The following tables present the Company’s consolidated revenues disaggregated by revenue source and reporting segment (in thousands):
| Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Valencia | San Francisco | Great Park(1) | Commercial(1) | Total | Valencia | San Francisco | Great Park(1) | Commercial(1) | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Land sales and land sales—related party | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
Management services—related party | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating properties | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating properties leasing revenues | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Valencia | San Francisco | Great Park(1) | Commercial(1) | Total | Valencia | San Francisco | Great Park(1) | Commercial(1) | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Land sales and land sales—related party | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
Management services—related party | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating properties | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating properties leasing revenues | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
(1) The tables above do not include revenues of the Great Park Venture and the Gateway Commercial Venture, which are included in the Company’s reporting segment totals (see Notes 4 and 13).
The Company, through the Management Company, has an amended and restated development management agreement (“A&R DMA”) with the Great Park Venture. The A&R DMA had an original term commencing on December 29, 2010 and ending on December 31, 2021 (the “Initial Term”). In addition to an annual fixed base fee and variable cost reimbursements, the Initial Term of the A&R DMA included incentive compensation that becomes payable in connection with and as a percentage of distributions made to the members of the Great Park Venture, including distributions made in periods after the Initial Term. Consideration in the form of contingent incentive compensation from the A&R DMA was recognized as revenue and a contract asset as services were provided over the contract term. By mutual agreement, the Initial Term has been extended through December 31, 2022 (the "2022 Extension"). The 2022 Extension resulted in the elimination of variable cost reimbursements and an increase in the annual fixed base fee to $12.0 million for 2022. The 2022 Extension did not change the incentive compensation provisions of the A&R DMA applicable to the Initial Term, subject to the clawback amount holdback described below (see Note 8).
The opening and closing balances of the Company’s contract assets for the six months ended June 30, 2022 were $87.6 million ($79.1 million related party, see Note 8) and $87.8 million ($80.2 million related party, see Note 8), respectively. The opening and closing balances of the Company’s contract assets for the six months ended June 30, 2021 were $85.1 million ($78.1 million related party) and $72.7 million ($67.0 million related party), respectively. The increase of $0.2 million for the six months ended June 30, 2022 between the opening and closing balances of the Company’s contract assets primarily resulted from a timing difference between when payments are made and the Company’s recognition of revenue earned from marketing fees from prior period land sales and agricultural crop sales. The decrease of $12.4 million for the six months ended June 30, 2021 between the opening and closing balances of the Company’s contract assets primarily resulted from the receipt of $21.3 million in incentive compensation payments from the Great Park Venture offset by additional incentive compensation earned during the period and recognized as a contract asset.
The opening and closing balances of the Company’s other receivables from contracts with customers and contract liabilities for the six months ended June 30, 2022 and 2021 were insignificant.
10
4. INVESTMENT IN UNCONSOLIDATED ENTITIES
Great Park Venture
The Great Park Venture has two classes of interests—“Percentage Interests” and “Legacy Interests.” The Operating Company owned 37.5 % of the Great Park Venture’s Percentage Interests as of June 30, 2022. Legacy Interest holders were entitled to receive priority distributions in an aggregate amount equal to $476.0 million and up to an additional $89.0 million from participation in subsequent distributions of cash depending on the performance of the Great Park Venture. The holders of the Percentage Interests will receive all other distributions. As of June 30, 2022, the Great Park Venture had fully satisfied the $476.0 million priority distribution rights, and the remaining maximum participating Legacy Interest distribution rights were $82.7 million.
The Great Park Venture is the owner of Great Park Neighborhoods, a mixed-use planned community located in Orange County, California. The Company, through the A&R DMA, as amended, manages the planning, development and sale of land at the Great Park Neighborhoods and supervises the day-to-day affairs of the Great Park Venture. The Great Park Venture is governed by an executive committee of representatives appointed by only the holders of Percentage Interests. The Company serves as the administrative member but does not control the actions of the executive committee. The Company accounts for its investment in the Great Park Venture using the equity method of accounting.
The carrying value of the Company’s investment in the Great Park Venture is higher than the Company’s underlying share of equity in the carrying value of net assets of the Great Park Venture, resulting in a basis difference. The Company’s earnings or losses from the equity method investment are adjusted by amortization and accretion of the basis differences as the assets (mainly inventory) and liabilities that gave rise to the basis difference are sold, settled or amortized.
During the six months ended June 30, 2022, the Great Park Venture recognized $3.2 million in land sale revenues to related parties of the Company and $0.6 million in land sale revenues to third parties. During the six months ended June 30, 2021, the Great Park Venture recognized $58.3 million in land sale revenues to related parties of the Company and $279.5 million in land sale revenues to third parties, of which $236.6 million relates to homesites sold to an unaffiliated land banking entity whereby a related party of the Company retained the option to acquire these homesites in the future from the land bank entity. Land sales to related parties include $57.4 million sold to an entity in which the Great Park Venture holds a 10 % interest (the “Great Park Landbank Venture”). The Great Park Landbank Venture is a land banking entity that was formed in June 2021. The Great Park Venture accounts for the investment under the equity method of accounting.
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Land sale and related party land sale revenues | $ | $ | |||||||||
| Home sale revenues | |||||||||||
Cost of land sales | ( | ( | |||||||||
| Cost of home sales | ( | ||||||||||
Other costs and expenses | ( | ( | |||||||||
| Net (loss) income of Great Park Venture | $ | ( | $ | ||||||||
| The Company’s share of net (loss) income | $ | ( | $ | ||||||||
| Basis difference amortization | ( | ( | |||||||||
| Equity in (loss) earnings from Great Park Venture | $ | ( | $ | ||||||||
11
The following table summarizes the balance sheet data of the Great Park Venture and the Company’s investment balance as of June 30, 2022 and December 31, 2021 (in thousands):
| June 30, 2022 | December 31, 2021 | ||||||||||
Inventories | $ | $ | |||||||||
Cash and cash equivalents | |||||||||||
Receivable and other assets | |||||||||||
Total assets | $ | $ | |||||||||
Accounts payable and other liabilities | $ | $ | |||||||||
Redeemable Legacy Interests | |||||||||||
Capital (Percentage Interest) | |||||||||||
Total liabilities and capital | $ | $ | |||||||||
The Company’s share of capital in Great Park Venture | $ | $ | |||||||||
Unamortized basis difference | |||||||||||
The Company’s investment in the Great Park Venture | $ | $ | |||||||||
Gateway Commercial Venture
The Company owned a 75 % interest in the Gateway Commercial Venture as of June 30, 2022. The Gateway Commercial Venture is governed by an executive committee in which the Company is entitled to appoint two individuals. One of the other members of the Gateway Commercial Venture is also entitled to appoint two individuals to the executive committee. The unanimous approval of the executive committee is required for certain matters, which limits the Company’s ability to control the Gateway Commercial Venture, however, the Company is able to exercise significant influence and therefore accounts for its investment in the Gateway Commercial Venture using the equity method. The Company is the manager of the Gateway Commercial Venture, with responsibility to manage and administer its day-to-day affairs and implement a business plan approved by the executive committee.
The Gateway Commercial Venture owns one commercial office building and approximately 50 acres of commercial land with additional development rights at a 73 acre office, medical, research and development campus located within the Great Park Neighborhoods (the “Five Point Gateway Campus”). The Five Point Gateway Campus consists of four buildings totaling approximately one million square feet. The Company and a subsidiary of Lennar lease portions of the building owned by the Gateway Commercial Venture, and during the six months ended June 30, 2022 and 2021, the Gateway Commercial Venture recognized $4.1 million and $4.2 million, respectively, in rental revenues from those leasing arrangements.
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Rental revenues | $ | $ | |||||||||
| Rental operating and other expenses | ( | ( | |||||||||
| Depreciation and amortization | ( | ( | |||||||||
| Interest expense | ( | ( | |||||||||
| Net income of Gateway Commercial Venture | $ | $ | |||||||||
| Equity in earnings from Gateway Commercial Venture | $ | $ | |||||||||
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| June 30, 2022 | December 31, 2021 | ||||||||||
| Real estate and related intangible assets, net | $ | $ | |||||||||
| Cash | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Notes payable, net | $ | $ | |||||||||
| Other liabilities | |||||||||||
| Members’ capital | |||||||||||
| Total liabilities and capital | $ | $ | |||||||||
| The Company’s investment in the Gateway Commercial Venture | $ | $ | |||||||||
The debt of the Gateway Commercial Venture is non-recourse to the Company other than in the case of customary “bad act” exceptions or bankruptcy or insolvency events.
Valencia Landbank Venture
As of June 30, 2022, the Company owned a 10 % interest in the Valencia Landbank Venture, an entity organized in December 2020 for the purpose of taking assignment from homebuilders of purchase and sale agreements for the purchase of residential lots within the Valencia community. The Valencia Landbank Venture concurrently enters into option and development agreements with homebuilders pursuant to which the homebuilders retain the option to purchase the land to construct and sell homes. The Company does not have a controlling financial interest in the Valencia Landbank Venture, however, the Company has the ability to significantly influence the Valencia Landbank Venture’s operating and financial policies, and most major decisions require the Company’s approval in addition to the approval of the Valencia Landbank Venture’s other unaffiliated member, and therefore the Company accounts for its investment in the Valencia Landbank Venture using the equity method. At June 30, 2022 and December 31, 2021, the Company’s investment in the Valencia Landbank Venture was $2.9 million and $3.8 million, respectively, and the Company recognized $0.5 million and $0.1 million in equity in earnings for the six months ended June 30, 2022 and 2021, respectively.
5. NONCONTROLLING INTERESTS
The Operating Company
The Holding Company’s wholly owned subsidiary is the managing general partner of the Operating Company, and at June 30, 2022, the Holding Company and its wholly owned subsidiary owned approximately 62.5 % of the outstanding Class A Common Units and 100 % of the outstanding Class B Common Units of the Operating Company. The Holding Company consolidates the financial results of the Operating Company and its subsidiaries and records a noncontrolling interest for the remaining 37.5 % of the outstanding Class A Common Units of the Operating Company that are owned separately by affiliates of Lennar, affiliates of Castlelake and an entity controlled by Emile Haddad, the Company’s Chairman Emeritus of the Board of Directors (the “Management Partner”).
After a 12 month holding period, holders of Class A Common Units of the Operating Company may exchange their units for, at the Company’s option, either (i) Class A common shares on a one -for-one basis (subject to adjustment in the event of share splits, distributions of shares, warrants or share rights, specified extraordinary distributions and similar events), or (ii) cash in an amount equal to the market value of such shares at the time of exchange. In either situation, an equal number of that holder’s Class B common shares will automatically convert into Class A common shares, at a ratio of 0.0003 Class A common shares for each Class B common share. This exchange right is currently exercisable by all holders of outstanding Class A Common Units of the Operating Company.
With each exchange of Class A Common Units of the Operating Company for Class A common shares, the Holding Company’s percentage ownership interest in the Operating Company and its share of the Operating Company’s cash distributions and profits and losses will increase. Additionally, other issuances of common shares of the Holding Company or common units of the Operating Company result in changes to the noncontrolling interest percentage. Such equity transactions result in an adjustment between members’ capital and the noncontrolling interest in the Company’s condensed consolidated balance sheet and statement of capital to account for the changes in the noncontrolling interest ownership percentage as well as any change in total net assets of the Company.
During the six months ended June 30, 2022 and 2021, the Holding Company’s ownership interest in the Operating Company changed as a result of net equity transactions related to the Company’s share-based compensation plan.
13
The terms of the Operating Company's Limited Partnership Agreement (“LPA”) provide for the payment of tax distributions to the Operating Company's partners in an amount equal to the estimated income tax liabilities resulting from taxable income or gain allocated to those parties. The tax distribution provisions in the LPA were included in the Operating Company's governing documents adopted prior to the Company’s initial public offering and were designed to provide funds necessary to pay tax liabilities for income that might be allocated, but not paid, to the partners.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Management Partner | $ | $ | $ | $ | |||||||||||||||||||
| Other partners (excluding the Holding Company) | |||||||||||||||||||||||
| Total tax distributions | $ | $ | $ | $ | |||||||||||||||||||
Generally, tax distributions are treated as advance distributions under the LPA and are taken into account when determining the amounts otherwise distributable under the LPA.
The San Francisco Venture
The San Francisco Venture has three classes of units—Class A, Class B and Class C units. The Operating Company owns all of the outstanding Class B units of the San Francisco Venture. All of the outstanding Class A units are owned by Lennar and Castlelake. The Class A units of the San Francisco Venture are intended to be substantially economically equivalent to the Class A Common Units of the Operating Company. The Class A units of the San Francisco Venture represent noncontrolling interests to the Operating Company.
Holders of Class A units of the San Francisco Venture can redeem their units at any time and receive Class A Common Units of the Operating Company on a one -for-one basis (subject to adjustment in the event of share splits, distributions of shares, warrants or share rights, specified extraordinary distributions and similar events). If a holder requests a redemption of Class A units of the San Francisco Venture that would result in the Holding Company’s ownership of the Operating Company falling below 50.1 %, the Holding Company has the option of satisfying the redemption with Class A common shares instead. The Company also has the option, at any time, to acquire outstanding Class A units of the San Francisco Venture in exchange for Class A Common Units of the Operating Company. The 12 month holding period for any Class A Common Units of the Operating Company issued in exchange for Class A units of the San Francisco Venture is calculated by including the period that such Class A units of the San Francisco Venture were owned. This exchange right is currently exercisable by all holders of outstanding Class A units of the San Francisco Venture.
Redeemable Noncontrolling Interest
6. CONSOLIDATED VARIABLE INTEREST ENTITY
14
The San Francisco Venture is a VIE as the other members of the venture, individually or as a group, are not able to exercise kick-out rights or substantive participating rights. The Company applied the variable interest model and determined that it is the primary beneficiary of the San Francisco Venture and, accordingly, the San Francisco Venture is consolidated in the Company’s results. In making that determination, the Company evaluated that the Operating Company has unilateral and unconditional power to make decisions in regards to the activities that significantly impact the economics of the VIE, which are the development of properties, marketing and sale of properties, acquisition of land and other real estate properties and obtaining land ownership or ground lease for the underlying properties to be developed. The Company is determined to have more-than-insignificant economic benefit from the San Francisco Venture because, excluding Class C units, the Operating Company can prevent or cause the San Francisco Venture from making distributions on its units, and the Operating Company would receive 99 % of any such distributions made (assuming no distributions had been paid on the Class A Common Units of the Operating Company). In addition, the San Francisco Venture is only allowed to make a capital call on the Operating Company and not any other interest holders, which could be a significant financial risk to the Operating Company.
As of June 30, 2022, the San Francisco Venture had total combined assets of $1.3 billion, primarily comprised of $1.29 billion of inventories, $0.9 million in related party assets and total combined liabilities of $72.9 million including $67.2 million in related party liabilities.
As of December 31, 2021, the San Francisco Venture had total combined assets of $1.3 billion, primarily comprised of $1.27 billion of inventories, $1.1 million in related party assets and total combined liabilities of $76.9 million including $69.5 million in related party liabilities.
Those assets are owned by, and those liabilities are obligations of, the San Francisco Venture, not the Company. The San Francisco Venture’s operating subsidiaries are not guarantors of the Company’s obligations, and the assets held by the San Francisco Venture may only be used as collateral for the San Francisco Venture’s obligations. The creditors of the San Francisco Venture do not have recourse to the assets of the Operating Company, as the VIE’s primary beneficiary, or of the Holding Company.
The Company and the other members do not generally have an obligation to make capital contributions to the San Francisco Venture. In addition, there are no liquidity arrangements or agreements to fund capital or purchase assets that could require the Company to provide financial support to the San Francisco Venture. The Company does not guarantee any debt of the San Francisco Venture. However, the Operating Company has guaranteed the performance of payment by the San Francisco Venture in accordance with the redemption terms of the Class C units of the San Francisco Venture (see Note 5).
FP LP and FPL are VIEs because the other partners or members have disproportionately fewer voting rights, and substantially all of the activities of the entities are conducted on behalf of the other partners or members and their related parties. The Operating Company, or a wholly owned subsidiary of the Operating Company, is the primary beneficiary of FP LP and FPL.
As of June 30, 2022, FP LP and FPL had combined assets of $1.1 billion, primarily comprised of $897.5 million of inventories, $51.4 million of intangibles, $80.2 million in related party assets, and total combined liabilities of $89.1 million, including $80.8 million in accounts payable and other liabilities and $8.4 million in related party liabilities.
As of December 31, 2021, FP LP and FPL had combined assets of $1.0 billion, primarily comprised of $826.4 million of inventories, $51.4 million of intangibles, $82.0 million in related party assets and total combined liabilities of $94.0 million, including $85.6 million in accounts payable and other liabilities and $8.4 million in related party liabilities.
The Company evaluates its primary beneficiary designation on an ongoing basis and assesses the appropriateness of the VIE’s status when events have occurred that would trigger such an analysis. During the six months ended June 30, 2022 and 2021, there were no VIEs that were deconsolidated.
7. INTANGIBLE ASSET, NET—RELATED PARTY
The intangible asset relates to the contract value of the incentive compensation provisions of the A&R DMA with the Great Park Venture. The intangible asset will be amortized over the expected contract period based on the pattern in which the economic benefits are expected to be received.
| June 30, 2022 | December 31, 2021 | ||||||||||
| Gross carrying amount | $ | $ | |||||||||
| Accumulated amortization | ( | ( | |||||||||
| Net book value | $ | $ | |||||||||
15
8. RELATED PARTY TRANSACTIONS
| June 30, 2022 | December 31, 2021 | ||||||||||
Related Party Assets: | |||||||||||
Contract assets (see Note 3) | $ | $ | |||||||||
| Operating lease right-of-use asset (corporate office lease at Five Point Gateway Campus) | |||||||||||
Other | |||||||||||
| $ | $ | ||||||||||
Related Party Liabilities: | |||||||||||
Reimbursement obligation | $ | $ | |||||||||
Payable to holders of Management Company’s Class B interests | |||||||||||
| Operating lease liability (corporate office lease at Five Point Gateway Campus) | |||||||||||
| Accrued advisory fees | |||||||||||
Other | |||||||||||
| $ | $ | ||||||||||
Development Management Agreement with the Great Park Venture (Incentive Compensation Contract Asset)
In 2010, the Great Park Venture, the Company’s equity method investee, engaged the Management Company under a development management agreement to provide management services to the Great Park Venture. The Initial Term of the development management agreement with the Great Park Venture expired on December 31, 2021 but has been extended by mutual agreement of the parties through December 31, 2022. The compensation structure in place consists of a base fee and incentive compensation. Incentive compensation is characterized as “Legacy Incentive Compensation” and “Non-Legacy Incentive Compensation.” Legacy Incentive Compensation consists of a maximum of $9.0 million of incentive compensation payments attributed to contingent payments made under a cash flow participation agreement to which the Great Park Venture is a party. Holders of the Management Company’s Class B interests are entitled to receive distributions from the Management Company that are attributable to any Legacy Incentive Compensation received by the Management Company. Non-Legacy Incentive Compensation is 9 % of distributions available to be made by the Great Park Venture to holders of Percentage Interests of the Great Park Venture during the Initial Term. If, however, the A&R DMA is not extended by mutual agreement of the parties beyond December 31, 2022 (a "Non-Renewal"), any incentive compensation payments received by the Company in calendar 2022 will be retroactively reduced from 9 % of distributions to 6.75 % of distributions (the “Clawback Amount”), the payment of which will be effected by reducing future incentive compensation payments made to the Company under the A&R DMA. If a Non-Renewal occurs and the Company is no longer providing management services subsequent to December 31, 2022, the Company will continue to be entitled to 6.75 % of Distributions paid thereafter, subject to the Clawback Amount holdback described above.
At each of June 30, 2022 and December 31, 2021, included in contract assets in the table above is $74.3 2.6 million and $6.0 million for the three and six months ended June 30, 2022, respectively, and $7.5 million and $19.9 million for the three and six months ended June 30, 2021, respectively.
Employment Transition Agreement and Advisory Agreement with Emile Haddad
On August 23, 2021, the Company and the Company’s then Chairman, Chief Executive Officer and President, Emile Haddad, entered into an employment transition agreement pursuant to which, effective as of September 30, 2021, Mr. Haddad stepped down from his roles as Chairman, Chief Executive Officer and President. Mr. Haddad remained a member of the Board of Directors serving as Chairman Emeritus. Concurrently, the Company also entered into an advisory agreement with Mr. Haddad for an initial term of three years , which became effective on October 1, 2021. At June 30, 2022, included in accrued advisory fees in the table above is $10.8 million attributed to Mr. Haddad’s advisory agreement (see Note 2).
16
Employment Transition Agreement and Advisory Agreement with Lynn Jochim
On February 9, 2022, the Company entered into an employment transition agreement with Lynn Jochim, the Company’s former President and Chief Operating Officer. Pursuant to the agreement, Ms. Jochim agreed to continue in her then current positions, at her then current compensation levels, until February 14, 2022. Concurrently, the Company also entered into an advisory agreement with Ms. Jochim for an initial term of three years , which became effective on February 15, 2022. Pursuant to the advisory agreement, the Company agreed to pay Ms. Jochim an annual retainer of $1.0 million. At June 30, 2022, included in accrued advisory fees in the table above is $2.6 million attributed to Ms. Jochim’s advisory agreement (see Note 2).
9. NOTES PAYABLE, NET
| June 30, 2022 | December 31, 2021 | ||||||||||
| $ | $ | ||||||||||
Unamortized debt issuance costs and discount | ( | ( | |||||||||
| $ | $ | ||||||||||
Revolving Credit Facility
10. TAX RECEIVABLE AGREEMENT
11. COMMITMENTS AND CONTINGENCIES
The Company is subject to the usual obligations associated with entering into contracts for the purchase, development and sale of real estate, which the Company does in the routine conduct of its business. The operations of the Company are conducted through the Operating Company and its subsidiaries, and in some cases, the Holding Company will guarantee the payment by or performance of the Operating Company or its subsidiaries. The Company has operating leases for its corporate office and other facilities and the Holding Company is a guarantor to some of these lease agreements. are included in other assets or related party assets, and are included in accounts payable and other liabilities or related party liabilities on the condensed consolidated balance sheets and were as follows as of June 30, 2022 and December 31, 2021 (in thousands):
| June 30, 2022 | December 31, 2021 | ||||||||||
Operating lease right-of-use assets ($ | $ | $ | |||||||||
Operating lease liabilities ($ | $ | $ | |||||||||
In addition to operating lease payment guarantees, the Holding Company had other contractual payment guarantees as of June 30, 2022 totaling $18.2 million.
Performance and Completion Bonding Agreements
In the ordinary course of business and as a part of the entitlement and development process, the Company is required to provide performance bonds to ensure completion of certain development obligations. The Company had outstanding performance bonds of $325.0 million and $279.6 million as of June 30, 2022 and December 31, 2021, respectively.
17
Candlestick and The San Francisco Shipyard Disposition and Development Agreement
The San Francisco Venture is a party to a disposition and development agreement with the Successor to the Redevelopment Agency of the City and County of San Francisco (the “San Francisco Agency”) in which the San Francisco Agency has agreed to convey portions of Candlestick and The San Francisco Shipyard to the San Francisco Venture for development. The San Francisco Venture has agreed to reimburse the San Francisco Agency for reasonable costs and expenses actually incurred and paid by the San Francisco Agency in performing its obligations under the disposition and development agreement. The San Francisco Agency can also earn a return of certain profits generated from the development and sale of Candlestick and The San Francisco Shipyard if certain thresholds are met.
At each of June 30, 2022 and December 31, 2021, the Company had outstanding guarantees benefiting the San Francisco Agency for infrastructure and construction of certain park and open space obligations with aggregate maximum obligations of $198.3
Letters of Credit
At each of June 30, 2022 and December 31, 2021, the Company had outstanding letters of credit totaling $1.3 1.0
Legal Proceedings
Hunters Point Litigation
In May 2018, residents of the Bayview Hunters Point neighborhood in San Francisco filed a putative class action in San Francisco Superior Court naming Tetra Tech, Inc. and Tetra Tech EC, Inc., an independent contractor hired by the U.S. Navy to conduct testing and remediation of toxic radiological waste at The San Francisco Shipyard (“Tetra Tech”), Lennar and the Company as defendants (the “Bayview Action”). The plaintiffs allege that, among other things, Tetra Tech fraudulently misrepresented its test results and remediation efforts. The plaintiffs are seeking damages against Tetra Tech and the Company and have requested an injunction to prevent the Company and Lennar from undertaking any development activities at The San Francisco Shipyard. Given the preliminary nature of the claims, the Company cannot predict the outcome of the Bayview Action.
Since July 2018, a number of lawsuits have been filed in San Francisco Superior Court on behalf of homeowners in The San Francisco Shipyard, which name Tetra Tech, Lennar and the Company, among others, as defendants (the “Homeowners Action”). The plaintiffs allege that environmental contamination issues at The San Francisco Shipyard were not properly disclosed to them before they purchased their homes. They also allege that Tetra Tech and other defendants (not including the Company) have created a nuisance at The San Francisco Shipyard under California law. They seek damages as well as certain declaratory relief.
All of these cases have been removed to the U.S. District Court for the Northern District of California. The Company believes that it has meritorious defenses to the allegations in all of these cases and may have insurance and indemnification rights against third parties, including related parties, with respect to these claims. In March 2022, the District Court approved the terms of a settlement of the Homeowners Action, including the payment of $6.3 million in damages to be paid out of insurance proceeds under a joint insurance policy held by the Company and Lennar, as well as a dismissal with prejudice to be entered on behalf of the Company. In June 2022, Tetra Tech filed a notice of appeal of the District Court’s judgment approving the settlement.
Other
Other than the actions outlined above, the Company is also a party to various other claims, legal actions, and complaints arising in the ordinary course of business, the disposition of which, in the Company’s opinion, will not have a material adverse effect on the Company’s condensed consolidated financial statements.
As a significant land owner and developer of unimproved land it is possible that environmental contamination conditions could exist that would require the Company to take corrective action. In the opinion of the Company, such corrective actions, if any, would not have a material adverse effect on the Company’s condensed consolidated financial statements.
18
12. SUPPLEMENTAL CASH FLOW INFORMATION
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | |||||||||||
| Cash paid for interest, all of which was capitalized to inventories | $ | $ | |||||||||
| Noncash lease expense | $ | $ | |||||||||
| NONCASH INVESTING AND FINANCING ACTIVITIES: | |||||||||||
| Adjustment to liability recognized under TRA | $ | ( | $ | ( | |||||||
| Cash paid for income taxes | $ | $ | |||||||||
Noncash lease expense is included within the depreciation and amortization adjustment to net loss on the Company’s condensed consolidated statements of cash flows.
| June 30, 2022 | June 30, 2021 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash and certificates of deposit | |||||||||||
| Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | $ | |||||||||
Amounts included in restricted cash and certificates of deposit represent amounts held as collateral on open letters of credit related to development obligations or because of other contractual obligations of the Company that require the restriction.
13. SEGMENT REPORTING
The Company’s reportable segments consist of:
• Valencia—includes the community of Valencia being developed in northern Los Angeles County, California. The Valencia segment derives revenues from the sale of residential and commercial land sites to homebuilders, commercial developers and commercial buyers. The Company’s investment in the Valencia Landbank Venture is also reported in the Valencia segment.
• San Francisco—includes the Candlestick and The San Francisco Shipyard communities located on bayfront property in the City of San Francisco, California. The San Francisco segment derives revenues from the sale of residential and commercial land sites to homebuilders, commercial developers and commercial buyers.
• Great Park—includes the Great Park Neighborhoods being developed adjacent to and around the Orange County Great Park, a metropolitan park under construction in Orange County, California. This segment also includes management services provided by the Management Company to the Great Park Venture, the owner of the Great Park Neighborhoods. As of June 30, 2022, the Company had a 37.5 % Percentage Interest in the Great Park Venture and accounted for the investment under the equity method. The reported segment information for the Great Park segment includes the results of 100% of the Great Park Venture at the historical basis of the venture, which did not apply push down accounting at acquisition date. The Great Park segment derives revenues at the Great Park Neighborhoods from sales of residential and commercial land sites to homebuilders, commercial developers and commercial buyers, sales of homes constructed and marketed under a fee build arrangement, and management services provided by the Company to the Great Park Venture.
• Commercial—includes the operations of the Gateway Commercial Venture, which owns an approximately 189,000 square foot office building at the Five Point Gateway Campus. The Five Point Gateway Campus is an office, medical and research and development campus located within the Great Park Neighborhoods and consists of four buildings and surrounding land. The Company and a subsidiary of Lennar lease portions of the building owned by the Gateway Commercial Venture. The Gateway Commercial Venture also owns approximately 50 acres of the surrounding commercial land with additional development rights at the campus. This segment also includes property management services provided by the Management Company to the Gateway Commercial Venture. As of June 30, 2022, the Company had a 75 % interest in the Gateway Commercial Venture and accounted for the investment under the equity method. The reported segment information for the Commercial segment includes the results of 100% of the Gateway Commercial Venture at the historical basis of the venture.
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| Revenues | Profit (Loss) | Revenues | Profit (Loss) | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||
Valencia | $ | $ | $ | ( | $ | ( | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||
San Francisco | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
Great Park | ( | ||||||||||||||||||||||||||||||||||||||||||||||
Commercial | |||||||||||||||||||||||||||||||||||||||||||||||
| Total reportable segments | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
Reconciling items: | |||||||||||||||||||||||||||||||||||||||||||||||
| Removal of results of unconsolidated entities— | |||||||||||||||||||||||||||||||||||||||||||||||
| Great Park Venture (1) | ( | ( | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| Gateway Commercial Venture (1) | ( | ( | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Add equity in (losses) earnings from unconsolidated entities— | |||||||||||||||||||||||||||||||||||||||||||||||
| Great Park Venture | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Gateway Commercial Venture | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
Corporate and unallocated (2) | — | — | ( | ( | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
Total consolidated balances | $ | $ | $ | ( | $ | ( | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||
(1) Represents the removal of the Great Park Venture and Gateway Commercial Venture operating results, which are included in the Great Park segment and Commercial segment operating results at 100% of each venture’s historical basis, respectively, but are not included in the Company’s consolidated results and balances as the Company accounts for its investment in each venture using the equity method of accounting.
(2) Corporate and unallocated activity is primarily comprised of corporate general and administrative expenses and restructuring expenses.
Segment assets and reconciliations to the Company’s consolidated balances are as follows (in thousands):
| June 30, 2022 | December 31, 2021 | ||||||||||
Valencia | $ | $ | |||||||||
San Francisco | |||||||||||
Great Park | |||||||||||
Commercial | |||||||||||
| Total reportable segments | |||||||||||
Reconciling items: | |||||||||||
Removal of unconsolidated balances of Great Park Venture (1) | ( | ( | |||||||||
Removal of unconsolidated balances of Gateway Commercial Venture (1) | ( | ( | |||||||||
Other eliminations (2) | ( | ( | |||||||||
Add investment balance in Great Park Venture | |||||||||||
Add investment balance in Gateway Commercial Venture | |||||||||||
Corporate and unallocated (3) | |||||||||||
Total consolidated balances | $ | $ | |||||||||
(1) Represents the removal of the Great Park Venture and Gateway Commercial Venture balances, which are included in the Great Park segment and Commercial segment balances at 100% of each venture’s historical basis, respectively, but are not included in the Company’s consolidated balances as the Company accounts for its investment in each venture using the equity method of accounting.
(2) Represents intersegment balances that eliminate in consolidation.
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14. SHARE-BASED COMPENSATION
| Share-Based Awards (in thousands) | Weighted-Average Grant Date Fair Value | ||||||||||
Nonvested at January 1, 2022 | $ | ||||||||||
Granted | $ | ||||||||||
Forfeited | ( | $ | |||||||||
Vested | ( | $ | |||||||||
Nonvested at June 30, 2022 | $ | ||||||||||
Share-based compensation expense was $0.7 million and $4.8 million for the three and six months ended June 30, 2022, respectively, and $1.1 million and $2.4 million for the three and six months ended June 30, 2021. In February 2022, the Company accelerated the expense attributed to the outstanding restricted share awards of two former officers of the Company resulting from a modification of the required service condition of the awards (see Note 2). As a result, for the six months ended June 30, 2022, share-based compensation expense of $3.0 million is included in restructuring expense and $1.8 million is included in selling, general, and administrative expenses on the accompanying condensed consolidated statement of operations. All share-based compensation for the three and six months ended June 30, 2021 is included in selling, general, and administrative expenses on the accompanying condensed consolidated statement of operations.
The estimated fair value at vesting of share-based awards that vested during the six months ended June 30, 2022 was $6.2 million. In January 2022 and 2021, the Company reacquired vested restricted Class A common shares for $2.7 million and $2.0 million, respectively, for the purpose of settling tax withholding obligations of employees. The reacquisition cost is based on the fair value of the Company’s Class A common shares on the date the tax obligation is incurred.
15. EMPLOYEE BENEFIT PLANS
Retirement Plan—The Newhall Land and Farming Company Retirement Plan (the “Retirement Plan”) is a defined benefit plan that is funded by the Company and qualified under the Employee Retirement Income Security Act. The Retirement Plan was frozen in 2004.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Net periodic benefit: | |||||||||||||||||||||||
Interest cost | $ | $ | $ | $ | |||||||||||||||||||
Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||
Amortization of net actuarial loss | |||||||||||||||||||||||
Net periodic benefit | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
16. INCOME TAXES
Upon formation, the Holding Company elected to be treated as a corporation for U.S. federal, state, and local tax purposes. All operations are carried on through the Holding Company’s subsidiaries, the majority of which are pass-through entities that are generally not subject to federal or state income taxation, as all of the taxable income, gains, losses, deductions, and credits are passed through to the partners. The Holding Company is responsible for income taxes on its allocable share of the Operating Company’s income or gain.
Other than a small income tax provision attributed to one of the Company’s consolidated subsidiary corporations, during the three months ended June 30, 2022, the Company recorded no provision or benefit for income taxes (after application of an increase in the Company’s valuation allowance) on pre-tax loss of $11.0 million. In the three months ended June 30, 2021, the Company recorded no provision or benefit for income taxes (after application of an increase in the Company’s valuation allowance) on pre-tax loss of $4.9 million. Other than a small income tax provision attributed to one of the Company’s consolidated subsidiary corporations, during the six months ended June 30, 2022, the Company recorded no provision or benefit for income taxes (after application of an increase in the Company’s valuation allowance) on pre-tax loss of $47.7 million. In the six months ended June 30, 2021, the Company
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recorded no provision or benefit for income taxes (after application of an increase in the Company’s valuation allowance) on pre-tax loss of $26.0 million. The effective tax rates for the six months ended June 30, 2022 and 2021, differ from the 21% federal statutory rate and applicable state statutory rates primarily due to the Company’s valuation allowance on its book losses, disallowance of executive compensation expenses not deductible for tax, and to the pre-tax portion of income and losses that are passed through to the other partners of the Operating Company and the San Francisco Venture.
Largely due to a history of book losses, the Company continues to record a valuation allowance against its federal and state net deferred tax assets.
17. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS AND DISCLOSURES
ASC Topic 820, Fair Value Measurement, emphasizes that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. The following hierarchy classifies the inputs used to determine fair value into three levels:
Level 1—Quoted prices for identical instruments in active markets
Level 2—Quoted prices for similar instruments in active markets or inputs, other than quoted prices, that are observable for the instrument either directly or indirectly
Level 3—Significant inputs to the valuation model are unobservable
At each reporting period, the Company evaluates the fair value of its financial instruments compared to carrying values. Other than the Company’s notes payable, net, the carrying amount of the Company’s financial instruments, which includes cash and cash equivalents, restricted cash and certificates of deposit, certain related party assets and liabilities, and accounts payable and other liabilities, approximated the Company’s estimates of fair value at both June 30, 2022 and December 31, 2021.
The fair value of the Company’s notes payable, net, are estimated based on quoted market prices or discounting the expected cash flows based on rates available to the Company (level 2). At June 30, 2022, the estimated fair value of notes payable, net was $519.5 million compared to a carrying value of $619.9 million. At December 31, 2021, the estimated fair value of notes payable, net was $655.6 million compared to a carrying value of $619.1 million. During the three and six months ended June 30, 2022 and 2021, the Company had no assets that were measured at fair value on a nonrecurring basis.
18. EARNINGS PER SHARE
The Company uses the two-class method in its computation of earnings per share. The Company’s Class A common shares and Class B common shares are entitled to receive distributions at different rates, with each Class B common share receiving 0.03 % of the distributions paid on each Class A common share. Under the two-class method, the Company’s net income available to common shareholders is allocated between the two classes of common shares on a fully-distributed basis and reflects residual net income after amounts attributed to noncontrolling interests. In the event of a net loss, the Company determined that both classes share in the Company’s losses, and they share in the losses using the same mechanism as the distributions. The Company also has restricted share awards and performance restricted share awards (see Note 14) that have a right to non-forfeitable dividends while unvested and are contemplated as participating when the Company is in a net income position. These awards participate in distributions on a basis equivalent to other Class A common shares but do not participate in losses.
No distributions on common shares were declared for the three and six months ended June 30, 2022 or 2021.
Diluted income (loss) per share calculations for both Class A common shares and Class B common shares contemplate adjustments to the numerator and the denominator under the if-converted method for the convertible Class B common shares, the exchangeable Class A units of the San Francisco Venture and the exchangeable Class A Common Units of the Operating Company. The Company uses the treasury stock method or the two-class method when evaluating dilution for RSUs, restricted shares, and performance restricted shares. The more dilutive of the two methods is included in the calculation for diluted income (loss) per share.
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The following table summarizes the basic and diluted loss per share calculations for the three and six months ended June 30, 2022 and 2021 (in thousands, except shares and per share amounts):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Numerator: | |||||||||||||||||||||||
| Net loss attributable to the Company | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Adjustments to net loss attributable to the Company | |||||||||||||||||||||||
| Net loss attributable to common shareholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Numerator—basic common shares: | |||||||||||||||||||||||
| Numerator for basic net loss available to Class A common shareholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Numerator for basic net loss available to Class B common shareholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Numerator—diluted common shares: | |||||||||||||||||||||||
| Net loss attributable to common shareholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Reallocation of loss upon assumed exchange of dilutive potential securities | ( | ( | |||||||||||||||||||||
| Allocation of diluted net loss among common shareholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Numerator for diluted net loss available to Class A common shareholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Numerator for diluted net loss available to Class B common shareholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Denominator: | |||||||||||||||||||||||
| Basic weighted average Class A common shares outstanding | |||||||||||||||||||||||
Diluted weighted average Class A common shares outstanding | |||||||||||||||||||||||
| Basic and diluted weighted average Class B common shares outstanding | |||||||||||||||||||||||
| Basic loss per share: | |||||||||||||||||||||||
Class A common shares | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Class B common shares | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Diluted loss per share: | |||||||||||||||||||||||
Class A common shares | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Class B common shares | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Anti-dilutive potential Performance RSUs | |||||||||||||||||||||||
Anti-dilutive potential Restricted Shares (weighted average) | |||||||||||||||||||||||
Anti-dilutive potential Performance Restricted Shares (weighted average) | |||||||||||||||||||||||
| Anti-dilutive potential Class A common shares from exchanges (weighted average) | |||||||||||||||||||||||
19. ACCUMULATED OTHER COMPREHENSIVE LOSS
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included under Part I, Item 1 of this report and our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. “Us,” “we,” and “our” refer to Five Point Holdings, LLC, together with its consolidated subsidiaries. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as well as other risks and uncertainties detailed from time to time in our subsequent Quarterly Reports on Form 10-Q and other filings with the Securities and Exchange Commission. Actual results could differ materially from those set forth in any forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements.”
Overview
We conduct all of our business in or through our operating company, Five Point Operating Company, LP (the “operating company”). We are, through a wholly owned subsidiary, the sole managing general partner and owned, as of June 30, 2022, approximately 62.5% of the operating company. The operating company directly or indirectly owns equity interests in:
•Five Point Land, LLC, which owns The Newhall Land & Farming Company, a California limited partnership, the entity that is developing Valencia, our community in northern Los Angeles County, California;
•The Shipyard Communities, LLC (the “San Francisco Venture”), which is developing Candlestick and The San Francisco Shipyard, our communities in the City of San Francisco, California;
•Heritage Fields LLC (the “Great Park Venture”), which is developing Great Park Neighborhoods, our community in Orange County, California;
•Five Point Office Venture Holdings I, LLC (the “Gateway Commercial Venture”), which owns portions of the Five Point Gateway Campus, a commercial office, research and development and medical campus located within the Great Park Neighborhoods; and
•Five Point Communities, LP and Five Point Communities Management, Inc. (together, the “management company”), which provide development and property management services for the Great Park Neighborhoods and the Five Point Gateway Campus.
The operating company consolidates and controls the management of all of these entities except for the Great Park Venture and the Gateway Commercial Venture. The operating company owns a 37.5% percentage interest in the Great Park Venture and a 75% interest in the Gateway Commercial Venture and accounts for its interest in both using the equity method.
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Operational Highlights
In the second quarter, we saw residential markets tighten due in part to the actions taken by the Federal Reserve to combat rising inflation. While there is uncertainty generally in the new home market, we believe that the long-term outlook is favorable, especially in our markets in California in which housing supply remains severely limited. In response to the headwinds posed by rising inflation and interest rates, we may elect to delay the timing of some residential land sales originally anticipated to occur this year at our Valencia and Great Park Neighborhoods communities in order to maximize the value of our communities and to better match the pace of home sales by our guest builders. Changes to the timing of our anticipated land sales could also result in the deferment of related development costs.
At Valencia, by June 30, 2022, our guest builders were selling in all 18 of the initial neighborhoods, two of which were substantially sold out by the end of the second quarter. Guest builders sold 168 homes during the second quarter, increasing total homes sold to 725 since sales began in May 2021.
At the Great Park Neighborhoods, in which we have a 37.5% percentage interest and manage all aspects of the development cycle, guest builders at our newest neighborhood, “Solis Park,” consisting of approximately 850 homes, began opening homes for sale during the second quarter of 2022. The majority of the builder collections at Solis Park, however, are planned to open in the third quarter of 2022, leaving a relatively low inventory of homes available for sale during the second quarter. As a result of the low inventory of homes available for sale, guest builders sold a total of 37 homes at the Great Park Neighborhoods during the three months ended June 30, 2022.
The initial term of our development management agreement with the Great Park Venture expired on December 31, 2021 but has been extended by mutual agreement of the parties through December 31, 2022 (the "2022 extension"). In connection with the 2022 extension, the variable cost reimbursement component under the development management agreement was eliminated and the annual fixed base fee was increased to $12.0 million for 2022. Under the development management agreement, as amended, we are entitled to incentive compensation payments equal to 9% of distributions available to be made by the Great Park Venture to holders of percentage interests of the Great Park Venture during the initial term. If, however, the development management agreement is not extended by mutual agreement of the parties beyond December 31, 2022 (a "non-renewal"), any incentive compensation payments received by us in calendar 2022 will be retroactively reduced from 9% of distributions to 6.75% of distributions (the “clawback amount”), the payment of which will be effected by reducing future incentive compensation payments made to us under the development management agreement. If a non-renewal occurs and we are no longer providing management services subsequent to December 31, 2022, we will continue to be entitled to 6.75% of distributions paid thereafter, subject to the clawback amount holdback described above. While we currently expect the development management agreement to be renewed following the expiration of the initial term, as extended, we can provide no assurance as to the terms or timing of any such renewal or that such renewal will be completed at all.
During the first quarter of 2022, we reassessed our staffing needs, resulting in layoffs affecting all of our locations. As a result of these layoffs and additional voluntary resignations, headcount has been reduced by approximately 29% since the beginning of 2022. We expect to continue to see significant cost savings in the balance of 2022 as a result of both our reduced headcount and our overall focus on cost management.
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Results of Operations
The timing of our land sale revenues is influenced by several factors, including the sequencing of the planning and development process and market conditions at our communities. As a result, we have historically experienced, and expect to continue to experience, variability in results of operations between comparable periods.
The following table summarizes our consolidated historical results of operations for the three and six months ended June 30, 2022 and 2021.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
Statement of Operations Data | |||||||||||||||||||||||
Revenues | |||||||||||||||||||||||
Land sales | $ | 14 | $ | 65 | $ | 571 | $ | 87 | |||||||||||||||
Land sales—related party | 1,711 | 37 | 1,712 | 56 | |||||||||||||||||||
Management services—related party | 2,703 | 7,647 | 6,250 | 20,086 | |||||||||||||||||||
Operating properties | 965 | 555 | 1,746 | 1,255 | |||||||||||||||||||
Total revenues | 5,393 | 8,304 | 10,279 | 21,484 | |||||||||||||||||||
Costs and expenses | |||||||||||||||||||||||
Land sales | — | — | — | — | |||||||||||||||||||
Management services | 2,200 | 5,848 | 4,884 | 16,625 | |||||||||||||||||||
Operating properties | 2,378 | 1,418 | 4,217 | 3,003 | |||||||||||||||||||
Selling, general, and administrative | 12,651 | 19,218 | 29,442 | 38,756 | |||||||||||||||||||
| Restructuring | — | — | 19,437 | — | |||||||||||||||||||
Total costs and expenses | 17,229 | 26,484 | 57,980 | 58,384 | |||||||||||||||||||
Other income | |||||||||||||||||||||||
Interest income | 117 | 26 | 138 | 53 | |||||||||||||||||||
Miscellaneous | 112 | 1,113 | 224 | 2,317 | |||||||||||||||||||
Total other income | 229 | 1,139 | 362 | 2,370 | |||||||||||||||||||
| Equity in earnings (loss) from unconsolidated entities | 643 | 12,119 | (389) | 8,563 | |||||||||||||||||||
| Loss before income tax provision | (10,964) | (4,922) | (47,728) | (25,967) | |||||||||||||||||||
| Income tax provision | (8) | (5) | (13) | (5) | |||||||||||||||||||
| Net loss | (10,972) | (4,927) | (47,741) | (25,972) | |||||||||||||||||||
| Less net loss attributable to noncontrolling interests | (5,861) | (2,638) | (25,500) | (13,904) | |||||||||||||||||||
| Net loss attributable to the company | $ | (5,111) | $ | (2,289) | $ | (22,241) | $ | (12,068) | |||||||||||||||
Three Months Ended June 30, 2022 and 2021
Revenues. Revenues decreased by $2.9 million, or 35.1%, to $5.4 million for the three months ended June 30, 2022, from $8.3 million for the three months ended June 30, 2021. The decrease in revenue during the three months ended June 30, 2022 was primarily due to a decrease in management services revenue at our Great Park segment.
Cost of management services. Cost of management services decreased by $3.6 million, or 62.4%, to $2.2 million for the three months ended June 30, 2022, from $5.8 million for the three months ended June 30, 2021. The decrease was primarily due to a decrease in intangible asset amortization expense at our Great Park segment.
Selling, general, and administrative. Selling, general, and administrative expenses decreased by $6.6 million, or 34.2%, to $12.7 million for the three months ended June 30, 2022, from $19.2 million for the three months ended June 30, 2021. The decrease was mainly attributable to a decrease in employee related expenses. We have had an approximately 29% reduction in headcount since the end of 2021. Most of the reductions were the result of layoffs that occurred at the end of the first quarter of 2022.
Equity in earnings from unconsolidated entities. Our consolidated results reflect our share in the earnings or losses of our interests in our unconsolidated entities, including the Great Park Venture and the Gateway Commercial Venture, within equity in earnings from unconsolidated entities on our condensed consolidated statement of operations. Our segment results for the Great Park segment and the Commercial segment present the results of the Great Park Venture and the Gateway Commercial Venture at the book basis of the ventures within the respective segments.
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Equity in earnings from unconsolidated entities decreased to $0.6 million for the three months ended June 30, 2022, from earnings of $12.1 million for the three months ended June 30, 2021. Equity in earnings for the three months ended June 30, 2022 and 2021 was primarily a result of recognizing our share of the net income of the Great Park Venture generated from home and land sales during each quarter.
Income taxes. Other than a small tax provision incurred by one of our consolidated subsidiary corporations, pre-tax loss of $11.0 million for the three months ended June 30, 2022 resulted in no tax benefit (after application of an increase in the Company’s valuation allowance of $1.0 million). We assessed the realization of our net deferred tax asset and the need for a valuation allowance and determined that at June 30, 2022, it was more likely than not that the net deferred tax asset was not realizable and resulted in a net deferred tax liability after application of the valuation allowance. Pre-tax loss for the three months ended June 30, 2021 of $4.9 million resulted in no tax benefit (after application of an increase in the Company’s valuation allowance of $0.5 million). Our effective tax rate, before changes in valuation allowance, for the three months ended June 30, 2022 was substantially similar to our effective tax rate, before changes in valuation allowance, for the three months ended June 30, 2021.
Net loss attributable to noncontrolling interests. Until exchanged for our Class A common shares or, at our election, cash, noncontrolling interests represent interests held by other partners in the operating company and members of the San Francisco Venture. Net loss attributable to the noncontrolling interests on the condensed consolidated statement of operations represents the portion of losses attributable to the interests in our subsidiaries held by the noncontrolling interests.
Six Months Ended June 30, 2022 and 2021
Revenues. Revenues decreased by $11.2 million, or 52.2%, to $10.3 million for the six months ended June 30, 2022, from $21.5 million for the six months ended June 30, 2021. The decrease in revenue during the six months ended June 30, 2022 was primarily due to a decrease in management services revenue at our Great Park segment.
Cost of management services. Cost of management services decreased by $11.7 million, or 70.6%, to $4.9 million for the six months ended June 30, 2022, from $16.6 million for the six months ended June 30, 2021. The decrease was primarily due to a decrease in intangible asset amortization expense at our Great Park segment.
Selling, general, and administrative. Selling, general, and administrative expenses decreased by $9.3 million, or 24.0%, to $29.4 million for the six months ended June 30, 2022, from $38.8 million for the six months ended June 30, 2021. The decrease was mainly attributable to a decrease in employee related expenses. We have had an approximately 29% reduction in headcount since the end of 2021. Most of the reductions were the result of layoffs that occurred at the end of the first quarter of 2022.
Restructuring. On February 9, 2022, Daniel Hedigan was appointed as our Chief Executive Officer. Preceding Mr. Hedigan’s appointment, Emile Haddad stepped down from his roles as Chairman, Chief Executive Officer and President effective as of September 30, 2021 and transitioned into a senior advisory role pursuant to a three-year advisory agreement. Mr. Haddad remains a member of the Board of Directors serving as Chairman Emeritus. Concurrent with Mr. Hedigan’s appointment, Lynn Jochim transitioned from her position as President and Chief Operating Officer into an advisory role pursuant to a three-year advisory agreement. Upon the appointment of Mr. Hedigan as our Chief Executive Officer, we accrued a related party liability of $15.6 million attributed to advisory agreement payments due to Mr. Haddad and Ms. Jochim over the term of the respective advisory agreements. In addition, we determined the service condition associated with Mr. Haddad and Ms. Jochim’s unvested restricted share awards had been modified. As a result of this modification, we recognized approximately $3.0 million in share-based compensation expense as a restructuring cost during the six months ended June 30, 2022.
In addition to our executive management restructuring activities, during the six months ended June 30, 2022, we incurred $0.9 million in restructuring costs for severance benefits from layoffs that occurred in March 2022.
Equity in (loss) earnings from unconsolidated entities. Equity in loss from unconsolidated entities was $0.4 million for the six months ended June 30, 2022, a decrease from earnings of $8.6 million for the six months ended June 30, 2021. The decrease was primarily a result of recognizing our share of the net loss generated by the Great Park Venture during the six months ended June 30, 2022 compared to net income generated by the Great Park Venture during the six months ended June 30, 2021.
Income taxes. Other than a small tax provision incurred by one of our consolidated subsidiary corporations, pre-tax loss of $47.7 million for the six months ended June 30, 2022 resulted in no tax benefit (after application of an increase in the Company’s valuation allowance of $5.2 million). We assessed the realization of our net deferred tax asset and the need for a valuation allowance and determined that at June 30, 2022, it was more likely than not that the net deferred tax asset was not realizable and resulted in a net deferred tax liability after application of the valuation allowance. Pre-tax loss for the six months ended June 30, 2021 of $26.0 million resulted in no tax benefit (after application of an increase in the Company’s valuation allowance of $2.6 million). Our effective tax rate, before changes in valuation allowance, for the six months ended June 30, 2022 was substantially similar to our effective tax rate, before changes in valuation allowance, for the six months ended June 30, 2021.
27
Net loss attributable to noncontrolling interests. Until exchanged for our Class A common shares or, at our election, cash, noncontrolling interests represent interests held by other partners in the operating company and members of the San Francisco Venture. Net loss attributable to the noncontrolling interests on the condensed consolidated statement of operations represents the portion of losses attributable to the interests in our subsidiaries held by the noncontrolling interests.
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Segment Results and Financial Information
Our four reportable operating segments include our three community segments, Valencia, San Francisco and Great Park, and our Commercial segment:
•Our Valencia segment includes operating results related to the Valencia community and agricultural operations in Los Angeles and Ventura Counties, California. Our investment in the Valencia Landbank Venture is also reported in the Valencia segment.
•Our San Francisco segment includes operating results for the Candlestick and The San Francisco Shipyard communities.
•Our Great Park segment includes operating results for the Great Park Neighborhoods community as well as development management services provided by the management company for the Great Park Venture.
•Our Commercial segment includes the operating results of the Gateway Commercial Venture’s ownership in the Five Point Gateway Campus as well as property management services provided by the management company for the Gateway Commercial Venture.
The following tables reconcile the results of operations of our segments to our consolidated results for the three and six months ended June 30, 2022 and 2021 (in thousands):
| Three Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Valencia | San Francisco | Great Park | Commercial | Total reportable segments | Corporate and unallocated | Total under management | Removal of unconsolidated entities(1) | Total consolidated | |||||||||||||||||||||||||||||||||||||||||||||
| REVENUES: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Land sales | $ | 14 | $ | — | $ | 262 | $ | — | $ | 276 | $ | — | $ | 276 | $ | (262) | $ | 14 | |||||||||||||||||||||||||||||||||||
| Land sales—related party | 1,711 | — | 1,744 | — | 3,455 | — | 3,455 | (1,744) | 1,711 | ||||||||||||||||||||||||||||||||||||||||||||
| Home sales | — | — | 23,314 | — | 23,314 | — | 23,314 | (23,314) | — | ||||||||||||||||||||||||||||||||||||||||||||
Management services—related party(2) | — | — | 2,602 | 101 | 2,703 | — | 2,703 | — | 2,703 | ||||||||||||||||||||||||||||||||||||||||||||
| Operating properties | 843 | 122 | — | 2,121 | 3,086 | — | 3,086 | (2,121) | 965 | ||||||||||||||||||||||||||||||||||||||||||||
| Total revenues | 2,568 | 122 | 27,922 | 2,222 | 32,834 | — | 32,834 | (27,441) | 5,393 | ||||||||||||||||||||||||||||||||||||||||||||
| COSTS AND EXPENSES: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Land sales | — | — | 13 | — | 13 | — | 13 | (13) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Home sales | — | — | 17,882 | — | 17,882 | — | 17,882 | (17,882) | — | ||||||||||||||||||||||||||||||||||||||||||||
Management services(2) | — | — | 2,200 | — | 2,200 | — | 2,200 | — | 2,200 | ||||||||||||||||||||||||||||||||||||||||||||
| Operating properties | 2,378 | — | — | 629 | 3,007 | — | 3,007 | (629) | 2,378 | ||||||||||||||||||||||||||||||||||||||||||||
| Selling, general, and administrative | 3,582 | 936 | 4,425 | 1,046 | 9,989 | 8,133 | 18,122 | (5,471) | 12,651 | ||||||||||||||||||||||||||||||||||||||||||||
| Management fees—related party | — | — | 1,848 | — | 1,848 | — | 1,848 | (1,848) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total costs and expenses | 5,960 | 936 | 26,368 | 1,675 | 34,939 | 8,133 | 43,072 | (25,843) | 17,229 | ||||||||||||||||||||||||||||||||||||||||||||
| OTHER INCOME (EXPENSE): | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest income | — | — | 89 | — | 89 | 117 | 206 | (89) | 117 | ||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | — | — | — | (313) | (313) | — | (313) | 313 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Miscellaneous | 112 | — | — | — | 112 | — | 112 | — | 112 | ||||||||||||||||||||||||||||||||||||||||||||
| Total other income (expense) | 112 | — | 89 | (313) | (112) | 117 | 5 | 224 | 229 | ||||||||||||||||||||||||||||||||||||||||||||
| EQUITY IN EARNINGS FROM UNCONSOLIDATED ENTITIES | 336 | — | 235 | — | 571 | — | 571 | 72 | 643 | ||||||||||||||||||||||||||||||||||||||||||||
| SEGMENT (LOSS) PROFIT/LOSS BEFORE INCOME TAX PROVISION | (2,944) | (814) | 1,878 | 234 | (1,646) | (8,016) | (9,662) | (1,302) | (10,964) | ||||||||||||||||||||||||||||||||||||||||||||
| INCOME TAX PROVISION | — | — | — | — | — | (8) | (8) | — | (8) | ||||||||||||||||||||||||||||||||||||||||||||
| SEGMENT (LOSS) PROFIT/NET LOSS | $ | (2,944) | $ | (814) | $ | 1,878 | $ | 234 | $ | (1,646) | $ | (8,024) | $ | (9,670) | $ | (1,302) | $ | (10,972) | |||||||||||||||||||||||||||||||||||
(1) Represents the removal of the Great Park Venture and Gateway Commercial Venture operating results, which are included in the Great Park segment and Commercial segment operating results at 100% of each venture’s historical basis, respectively, but are not included in our consolidated results as we account for our investment in each venture using the equity method of accounting.
(2) For the Great Park and Commercial segments, represents the revenues and expenses attributable to the management company for providing services to the Great Park Venture and the Gateway Commercial Venture, as applicable.
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| Three Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Valencia | San Francisco | Great Park | Commercial | Total reportable segments | Corporate and unallocated | Total under management | Removal of unconsolidated entities(1) | Total consolidated | |||||||||||||||||||||||||||||||||||||||||||||
| REVENUES: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Land sales | $ | 65 | $ | — | $ | 278,726 | $ | — | $ | 278,791 | $ | — | $ | 278,791 | $ | (278,726) | $ | 65 | |||||||||||||||||||||||||||||||||||
| Land sales—related party | 37 | — | 58,140 | — | 58,177 | — | 58,177 | (58,140) | 37 | ||||||||||||||||||||||||||||||||||||||||||||
Management services—related party(2) | — | — | 7,544 | 103 | 7,647 | — | 7,647 | — | 7,647 | ||||||||||||||||||||||||||||||||||||||||||||
| Operating properties | 414 | 141 | — | 2,148 | 2,703 | — | 2,703 | (2,148) | 555 | ||||||||||||||||||||||||||||||||||||||||||||
| Total revenues | 516 | 141 | 344,410 | 2,251 | 347,318 | — | 347,318 | (339,014) | 8,304 | ||||||||||||||||||||||||||||||||||||||||||||
| COSTS AND EXPENSES: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Land sales | — | — | 251,420 | — | 251,420 | — | 251,420 | (251,420) | — | ||||||||||||||||||||||||||||||||||||||||||||
Management services(2) | — | — | 5,848 | — | 5,848 | — | 5,848 | — | 5,848 | ||||||||||||||||||||||||||||||||||||||||||||
| Operating properties | 1,418 | — | — | 510 | 1,928 | — | 1,928 | (510) | 1,418 | ||||||||||||||||||||||||||||||||||||||||||||
| Selling, general, and administrative | 5,483 | 937 | 8,636 | 1,158 | 16,214 | 12,798 | 29,012 | (9,794) | 19,218 | ||||||||||||||||||||||||||||||||||||||||||||
| Management fees—related party | — | — | 6,382 | — | 6,382 | — | 6,382 | (6,382) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total costs and expenses | 6,901 | 937 | 272,286 | 1,668 | 281,792 | 12,798 | 294,590 | (268,106) | 26,484 | ||||||||||||||||||||||||||||||||||||||||||||
| OTHER INCOME (EXPENSE): | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest income | — | — | 91 | — | 91 | 26 | 117 | (91) | 26 | ||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | — | — | — | (307) | (307) | — | (307) | 307 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Miscellaneous | 135 | — | — | — | 135 | 978 | 1,113 | — | 1,113 | ||||||||||||||||||||||||||||||||||||||||||||
| Total other income (expense) | 135 | — | 91 | (307) | (81) | 1,004 | 923 | 216 | 1,139 | ||||||||||||||||||||||||||||||||||||||||||||
| EQUITY IN EARNINGS (LOSS) FROM UNCONSOLIDATED ENTITIES | 121 | — | (1,409) | — | (1,288) | — | (1,288) | 13,407 | 12,119 | ||||||||||||||||||||||||||||||||||||||||||||
| SEGMENT (LOSS) PROFIT/LOSS BEFORE INCOME TAX PROVISION | (6,129) | (796) | 70,806 | 276 | 64,157 | (11,794) | 52,363 | (57,285) | (4,922) | ||||||||||||||||||||||||||||||||||||||||||||
| INCOME TAX PROVISION | — | — | — | — | — | (5) | (5) | — | (5) | ||||||||||||||||||||||||||||||||||||||||||||
| SEGMENT (LOSS) PROFIT/NET LOSS | $ | (6,129) | $ | (796) | $ | 70,806 | $ | 276 | $ | 64,157 | $ | (11,799) | $ | 52,358 | $ | (57,285) | $ | (4,927) | |||||||||||||||||||||||||||||||||||
(1) Represents the removal of the Great Park Venture and Gateway Commercial Venture operating results, which are included in the Great Park segment and Commercial segment operating results at 100% of each venture’s historical basis, respectively, but are not included in our consolidated results as we account for our investment in each venture using the equity method of accounting.
(2) For the Great Park and Commercial segments, represents the revenues and expenses attributable to the management company for providing services to the Great Park Venture and the Gateway Commercial Venture, as applicable.
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| Six Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Valencia | San Francisco | Great Park | Commercial | Total reportable segments | Corporate and unallocated | Total under management | Removal of unconsolidated entities(1) | Total consolidated | |||||||||||||||||||||||||||||||||||||||||||||
| REVENUES: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Land sales | $ | 571 | $ | — | $ | 592 | $ | — | $ | 1,163 | $ | — | $ | 1,163 | $ | (592) | $ | 571 | |||||||||||||||||||||||||||||||||||
| Land sales—related party | 1,712 | — | 3,233 | — | 4,945 | — | 4,945 | (3,233) | 1,712 | ||||||||||||||||||||||||||||||||||||||||||||
| Home sales | — | — | 40,475 | — | 40,475 | — | 40,475 | (40,475) | — | ||||||||||||||||||||||||||||||||||||||||||||
Management services—related party(2) | — | — | 6,046 | 204 | 6,250 | — | 6,250 | — | 6,250 | ||||||||||||||||||||||||||||||||||||||||||||
| Operating properties | 1,444 | 302 | — | 4,059 | 5,805 | — | 5,805 | (4,059) | 1,746 | ||||||||||||||||||||||||||||||||||||||||||||
| Total revenues | 3,727 | 302 | 50,346 | 4,263 | 58,638 | — | 58,638 | (48,359) | 10,279 | ||||||||||||||||||||||||||||||||||||||||||||
| COSTS AND EXPENSES: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Land sales | — | — | 13 | — | 13 | — | 13 | (13) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Home sales | — | — | 30,784 | — | 30,784 | — | 30,784 | (30,784) | — | ||||||||||||||||||||||||||||||||||||||||||||
Management services(2) | — | — | 4,884 | — | 4,884 | — | 4,884 | — | 4,884 | ||||||||||||||||||||||||||||||||||||||||||||
| Operating properties | 4,217 | — | — | 1,069 | 5,286 | — | 5,286 | (1,069) | 4,217 | ||||||||||||||||||||||||||||||||||||||||||||
| Selling, general, and administrative | 8,026 | 1,785 | 11,986 | 2,125 | 23,922 | 19,631 | 43,553 | (14,111) | 29,442 | ||||||||||||||||||||||||||||||||||||||||||||
| Restructuring | — | — | — | — | — | 19,437 | 19,437 | — | 19,437 | ||||||||||||||||||||||||||||||||||||||||||||
| Management fees—related party | — | — | 3,351 | — | 3,351 | — | 3,351 | (3,351) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total costs and expenses | 12,243 | 1,785 | 51,018 | 3,194 | 68,240 | 39,068 | 107,308 | (49,328) | 57,980 | ||||||||||||||||||||||||||||||||||||||||||||
| OTHER INCOME (EXPENSE): | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest income | — | — | 244 | — | 244 | 138 | 382 | (244) | 138 | ||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | — | — | — | (620) | (620) | — | (620) | 620 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Miscellaneous | 224 | — | — | — | 224 | — | 224 | — | 224 | ||||||||||||||||||||||||||||||||||||||||||||
| Total other income (expense) | 224 | — | 244 | (620) | (152) | 138 | (14) | 376 | 362 | ||||||||||||||||||||||||||||||||||||||||||||
| EQUITY IN EARNINGS (LOSS) FROM UNCONSOLIDATED ENTITIES | 521 | — | 235 | — | 756 | — | 756 | (1,145) | (389) | ||||||||||||||||||||||||||||||||||||||||||||
| SEGMENT (LOSS) PROFIT/LOSS BEFORE INCOME TAX PROVISION | (7,771) | (1,483) | (193) | 449 | (8,998) | (38,930) | (47,928) | 200 | (47,728) | ||||||||||||||||||||||||||||||||||||||||||||
| INCOME TAX PROVISION | — | — | — | — | — | (13) | (13) | — | (13) | ||||||||||||||||||||||||||||||||||||||||||||
| SEGMENT (LOSS) PROFIT/NET LOSS | $ | (7,771) | $ | (1,483) | $ | (193) | $ | 449 | $ | (8,998) | $ | (38,943) | $ | (47,941) | $ | 200 | $ | (47,741) | |||||||||||||||||||||||||||||||||||
(1) Represents the removal of the Great Park Venture and Gateway Commercial Venture operating results, which are included in the Great Park segment and Commercial segment operating results at 100% of each venture’s historical basis, respectively, but are not included in our consolidated results as we account for our investment in each venture using the equity method of accounting.
(2) For the Great Park and Commercial segments, represents the revenues and expenses attributable to the management company for providing services to the Great Park Venture and the Gateway Commercial Venture, as applicable.
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| Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Valencia | San Francisco | Great Park | Commercial | Total reportable segments | Corporate and unallocated | Total under management | Removal of unconsolidated entities(1) | Total consolidated | |||||||||||||||||||||||||||||||||||||||||||||
| REVENUES: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Land sales | $ | 87 | $ | — | $ | 279,467 | $ | — | $ | 279,554 | $ | — | $ | 279,554 | $ | (279,467) | $ | 87 | |||||||||||||||||||||||||||||||||||
| Land sales—related party | 56 | — | 58,359 | — | 58,415 | — | 58,415 | (58,359) | 56 | ||||||||||||||||||||||||||||||||||||||||||||
Management services—related party(2) | — | — | 19,884 | 202 | 20,086 | — | 20,086 | — | 20,086 | ||||||||||||||||||||||||||||||||||||||||||||
| Operating properties | 965 | 290 | — | 4,249 | 5,504 | — | 5,504 | (4,249) | 1,255 | ||||||||||||||||||||||||||||||||||||||||||||
| Total revenues | 1,108 | 290 | 357,710 | 4,451 | 363,559 | — | 363,559 | (342,075) | 21,484 | ||||||||||||||||||||||||||||||||||||||||||||
| COSTS AND EXPENSES: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Land sales | — | — | 251,420 | — | 251,420 | — | 251,420 | (251,420) | — | ||||||||||||||||||||||||||||||||||||||||||||
Management services(2) | — | — | 16,625 | — | 16,625 | — | 16,625 | — | 16,625 | ||||||||||||||||||||||||||||||||||||||||||||
| Operating properties | 3,003 | — | — | 669 | 3,672 | — | 3,672 | (669) | 3,003 | ||||||||||||||||||||||||||||||||||||||||||||
| Selling, general, and administrative | 9,523 | 2,062 | 16,204 | 2,317 | 30,106 | 27,171 | 57,277 | (18,521) | 38,756 | ||||||||||||||||||||||||||||||||||||||||||||
| Management fees—related party | — | — | 12,500 | — | 12,500 | — | 12,500 | (12,500) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total costs and expenses | 12,526 | 2,062 | 296,749 | 2,986 | 314,323 | 27,171 | 341,494 | (283,110) | 58,384 | ||||||||||||||||||||||||||||||||||||||||||||
| OTHER INCOME (EXPENSE): | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest income | — | — | 333 | — | 333 | 53 | 386 | (333) | 53 | ||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | — | — | — | (610) | (610) | — | (610) | 610 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Miscellaneous | 269 | 1,070 | — | — | 1,339 | 978 | 2,317 | — | 2,317 | ||||||||||||||||||||||||||||||||||||||||||||
| Total other income (expense) | 269 | 1,070 | 333 | (610) | 1,062 | 1,031 | 2,093 | 277 | 2,370 | ||||||||||||||||||||||||||||||||||||||||||||
| EQUITY IN EARNINGS (LOSS) FROM UNCONSOLIDATED ENTITIES | 121 | — | (1,409) | — | (1,288) | — | (1,288) | 9,851 | 8,563 | ||||||||||||||||||||||||||||||||||||||||||||
| SEGMENT (LOSS) PROFIT/LOSS BEFORE INCOME TAX PROVISION | (11,028) | (702) | 59,885 | 855 | 49,010 | (26,140) | 22,870 | (48,837) | (25,967) | ||||||||||||||||||||||||||||||||||||||||||||
| INCOME TAX PROVISION | — | — | — | — | — | (5) | (5) | — | (5) | ||||||||||||||||||||||||||||||||||||||||||||
| SEGMENT (LOSS) PROFIT/NET LOSS | $ | (11,028) | $ | (702) | $ | 59,885 | $ | 855 | $ | 49,010 | $ | (26,145) | $ | 22,865 | $ | (48,837) | $ | (25,972) | |||||||||||||||||||||||||||||||||||
(1) Represents the removal of the Great Park Venture and Gateway Commercial Venture operating results, which are included in the Great Park segment and Commercial segment operating results at 100% of each venture’s historical basis, respectively, but are not included in our consolidated results as we account for our investment in each venture using the equity method of accounting.
(2) For the Great Park and Commercial segments, represents the revenues and expenses attributable to the management company for providing services to the Great Park Venture and the Gateway Commercial Venture, as applicable.
Valencia Segment
Our Valencia property consists of approximately 15,000 acres in northern Los Angeles County and is designed to include approximately 21,500 homesites and approximately 11.5 million square feet of commercial space. Valencia is the continuation of our community where already today approximately 20,000 households reside and approximately 60,000 people work. We began selling homesites in the first development area at Valencia in 2019.
Three Months Ended June 30, 2022 and 2021
Selling, general, and administrative. Selling, general, and administrative expenses decreased by $1.9 million, or 34.7%, to $3.6 million for the three months ended June 30, 2022, from $5.5 million for the three months ended June 30, 2021. The decrease was mainly attributable to a decrease in community related selling and marketing expenses and a decrease in employee related expenses.
Six Months Ended June 30, 2022 and 2021
Selling, general, and administrative. Selling, general, and administrative expenses decreased by $1.5 million, or 15.7%, to $8.0 million for the six months ended June 30, 2022, from $9.5 million for the six months ended June 30, 2021. The decrease was mainly attributable to a decrease in community related selling and marketing expenses and a decrease in employee related expenses.
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San Francisco Segment
Located almost equidistant between downtown San Francisco and the San Francisco International Airport, Candlestick and The San Francisco Shipyard consist of approximately 800 acres of bayfront property in the City of San Francisco. Candlestick and The San Francisco Shipyard are designed to include approximately 12,000 homesites and approximately 6.3 million square feet of commercial space.
In October 2019, we received approval from the City of San Francisco on a revised development plan for the first phase of Candlestick that is currently planned to include approximately 750,000 square feet of office space, 1,600 homes, and 300,000 square feet of lifestyle amenities centered around retail and entertainment. As currently planned, Candlestick ultimately is expected to include approximately 7,000 homes.
Our development at Candlestick and The San Francisco Shipyard is not subject to San Francisco’s Proposition M growth control measure, which imposes annual limitations on office development and is applicable to all other developers with projects in the city. This means the full amount of permitted commercial square footage at Candlestick and The San Francisco Shipyard can be constructed as we determine, including all at once, even though Proposition M may delay new office developments elsewhere in San Francisco. In 2018, our disposition and development agreement with the City of San Francisco was amended to increase the total amount of commercial use at Candlestick and The San Francisco Shipyard by over two million square feet and to increase our total commercial space to approximately 6.3 million square feet.
At The San Francisco Shipyard, approximately 408 acres are still owned by the U.S. Navy and will not be conveyed to us until the U.S. Navy satisfactorily completes its finding of suitability to transfer, or “FOST,” process, which involves multiple levels of environmental and governmental investigation, analysis, review, comment and approval. Based on our discussions with the U.S. Navy, we had previously expected the U.S. Navy to deliver this property between 2019 and 2022. However, allegations that Tetra Tech, Inc. and Tetra Tech EC, Inc. (collectively, “Tetra Tech”), contractors hired by the U.S. Navy, misrepresented sampling results at The San Francisco Shipyard have resulted in data reevaluation, governmental investigations, criminal proceedings, lawsuits, and a determination by the U.S. Navy and other regulatory agencies to undertake additional sampling. As part of the 2018 Congressional spending bill, the U.S. Department of Defense allocated $36.0 million to help fund resampling efforts at The San Francisco Shipyard. An additional $60.4 million to fund resampling efforts was approved as part of a 2019 military construction spending bill. These activities have delayed the remaining land transfers from the U.S. Navy and could lead to additional legal claims or government investigations, all of which could in turn further delay or impede our future development of such parcels. Our development plans were designed with the flexibility to adjust for potential land transfer delays, and we have the ability to shift the phasing of our development activities to account for potential delays caused by U.S. Navy retesting, but there can be no assurance that these matters and other related matters that may arise in the future will not materially impact our development plans.
We have been, and may in the future be, named as a defendant in lawsuits seeking damages and other relief arising out of alleged contamination at The San Francisco Shipyard and Tetra Tech’s alleged misrepresentations of related sampling work. See Note 11 to our condensed consolidated financial statements included under Part I, Item 1 of this report.
Great Park Segment
We have a 37.5% percentage interest in the Great Park Venture, and we account for our investment using the equity method of accounting. We have a controlling interest in the management company, an entity which performs development management services at Great Park Neighborhoods. We do not include the Great Park Venture as a consolidated subsidiary in our condensed consolidated financial statements. However, because of the relationship between the management company and the Great Park Venture, we assess our investment in the Great Park Venture based on the financial information for the Great Park Venture in its entirety, and not just our equity interest in it. As a result, our Great Park segment consists of the operations of both the Great Park Venture and the development management services provided by the management company at the Great Park Venture.
Great Park Neighborhoods consists of approximately 2,100 acres in Orange County and is being built around the approximately 1,300 acre Orange County Great Park, a metropolitan public park that is under construction. Great Park Neighborhoods is designed to include approximately 10,500 homesites and approximately 4.9 million square feet of commercial space.
Interests in the Great Park Venture are either “percentage interests” or “legacy interests.” Holders of the legacy interests were entitled to receive priority distributions in an aggregate amount equal to $476.0 million and up to an additional $89.0 million from participation in subsequent distributions. The holders of percentage interests are entitled to all other distributions. As of June 30, 2022, the Great Park Venture had fully satisfied the $476.0 million priority distribution rights, and the remaining maximum participating legacy interest distribution rights were $82.7 million. The remaining $82.7 million legacy interest will be paid on a pro-rata basis, with approximately 10% of future distributions paid to the holders of legacy interests and approximately 90% of such distributions paid to the holders of the percentage interests, until such time as the remaining balance has been fully paid.
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Three Months Ended June 30, 2022 and 2021
Land sales and related party land sales revenues. Land sales and related party land sales revenues decreased to $2.0 million for the three months ended June 30, 2022, from $336.9 million for the three months ended June 30, 2021. The decrease was primarily attributable to the recognition of revenue from the sale of land at the Great Park Neighborhoods entitled for an aggregate of 774 homesites on approximately 58 acres during the three months ended June 30, 2021, compared to no land sales during the same period in 2022. The base purchase price was $328.2 million for the 2021 land sales. The Great Park Venture also recognized $7.6 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that it expects to be entitled to receive. 117 of the homesites sold were purchased by a land banking entity, in which the Great Park Venture owns a 10% equity interest (the “Great Park Landbank Venture”). Revenues associated with these closings are reported as land sales—related party. When the Great Park Venture sells land to the Great Park Landbank Venture, it eliminates its pro-rata share of the intra-entity profits generated from the sale through earnings (loss) from unconsolidated entities until the land is sold by the Great Park Landbank Venture to third party homebuilders. 572 of the homesites were sold to an unaffiliated land banking entity whereby a related party retained the option to acquire the homesites in the future from the land bank entity.
During the three months ended June 30, 2022 and 2021, segment land sales and related party land sales revenues also included changes in estimates of variable land sale consideration, including profit participation, from those amounts previously recorded by the Great Park Venture.
Cost of Land Sales. Cost of land sales for the three months ended June 30, 2021 was $251.4 million, or 74.6% of total land sales revenues. The cost of land sales includes both actual and estimated future capitalized costs allocated based upon relative sales values. Since this method requires the Great Park Venture to estimate future development costs and the expected sales prices for future land sales, the profit margin on subsequent parcels sold will be affected by both changes in the estimated total revenues, as well as any changes in the estimated total cost of the project.
Home Sale Revenues. The Great Park Venture has a fee build agreement with an unrelated third party (“fee builder”) that the Great Park Venture contracted to build and act as a sales agent for 38 homesites within the Great Park Neighborhoods. The fee builder initially incurs all costs to build, market and sell the residential homes, and the Great Park Venture reimburses the fee builder as construction progresses and pays the fee builder certain fees during the construction phase of the homes and when homes are sold to homebuyers. During the three months ended June 30, 2022, the Great Park Venture closed the sales of 13 homes to homebuyers generating $23.3 million in home sale revenues. With the 13 home sales that closed in the three months ended June 30, 2022, all 38 homes subject to the fee build agreement have been sold and closed.
Cost of Home Sales. Cost of home sales includes an allocation of land basis for each home sold in addition to home construction costs the Great Park Venture reimburses to the fee builder and fees paid to the fee builder for the services provided. During the three months ended June 30, 2022, the Great Park Venture recognized $17.9 million in cost of home sales.
Management fee revenues. Management fee revenues are revenues generated by the management company from development management services provided to the Great Park Venture. The decrease in management services related party revenue was mainly attributable to the revised annual compensation structure in place for 2022 per the terms of the 2022 extension of the development management agreement and no variable incentive compensation revenue recognized during the three months ended June 30, 2022.
Management services costs and expenses. Included within management services costs and expenses are general and administrative costs and expenses incurred by the management company’s project team that is managing the development of the Great Park Neighborhoods. We also include amortization expense related to the intangible asset attributable to the incentive compensation provisions of the development management agreement with the Great Park Venture within management services costs and expenses. Corporate and non-project team salaries and overhead are not allocated to management services costs and expenses or to our reportable segments and are reported in selling, general, and administrative costs in the condensed consolidated statements of operations. Management services costs and expenses decreased by $3.6 million, or 62.4%, to $2.2 million for the three months ended June 30, 2022, from $5.8 million for the three months ended June 30, 2021. The decrease was mainly attributable to no intangible asset amortization expense recognized during the three months ended June 30, 2022.
Selling, general, and administrative. Selling, general, and administrative expenses decreased by $4.2 million, or 48.8%, to $4.4 million for the three months ended June 30, 2022, from $8.6 million for the three months ended June 30, 2021. The lower expense during the three months ended June 30, 2022 was mainly attributable to a decrease in marketing expenses incurred at the Great Park Neighborhoods.
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Management fees—related party. Management fees decreased by $4.5 million, or 71.0%, to $1.8 million for the three months ended June 30, 2022, from $6.4 million for the three months ended June 30, 2021. Management fees incurred by the Great Park Venture are comprised of base development management fees and incentive compensation fees. In general, incentive compensation fees will be paid based on a percentage of distributions made to holders of the Great Park Venture’s percentage interests. When payments are deemed probable of being made, the Great Park Venture recognizes the expense ratably over the period services are expected to be provided. When estimates of the amount of incentive compensation probable of being paid change, the Great Park Venture records a cumulative adjustment in the period in which the estimate changes. The decrease in management fees—related party was mainly attributable to the revised annual compensation structure in place for 2022 per the terms of the 2022 extension of the development management agreement and no incentive compensation fees recognized during the three months ended June 30, 2022.
Six Months Ended June 30, 2022 and 2021
Land sales and related party land sales revenues. Land sales and related party land sales revenues decreased to $3.8 million for the six months ended June 30, 2022, from $337.8 million for the six months ended June 30, 2021. The decrease was primarily attributable to the recognition of revenue from the sale of land at the Great Park Neighborhoods entitled for an aggregate of 774 homesites on approximately 58 acres during the six months ended June 30, 2021, compared to no land sales during the same period in 2022. The base purchase price was $328.2 million for the 2021 land sales. The Great Park Venture also recognized $7.6 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that it expects to be entitled to receive. 117 of the homesites sold were purchased by the Great Park Landbank Venture, in which the Great Park Venture owns a 10% equity interest. Revenues associated with these closings are reported as land sales—related party. When the Great Park Venture sells land to the Great Park Landbank Venture, it eliminates its pro-rata share of the intra-entity profits generated from the sale through earnings (loss) from unconsolidated entities until the land is sold by the Great Park Landbank Venture to third party homebuilders. 572 of the homesites were sold to an unaffiliated land banking entity whereby a related party retained the option to acquire the homesites in the future from the land bank entity.
During the six months ended June 30, 2022 and 2021, segment land sales and related party land sales revenues also included changes in estimates of variable land sale consideration, including profit participation, from those amounts previously recorded by the Great Park Venture.
Cost of Land Sales. Cost of land sales for the six months ended June 30, 2021 was $251.4 million, or 74.4% of total land sales revenues. The cost of land sales includes both actual and estimated future capitalized costs allocated based upon relative sales values. Since this method requires the Great Park Venture to estimate future development costs and the expected sales prices for future land sales, the profit margin on subsequent parcels sold will be affected by both changes in the estimated total revenues, as well as any changes in the estimated total cost of the project.
Home Sale Revenues. The Great Park Venture has a fee build agreement with an unrelated third party fee builder that the Great Park Venture contracted to build and act as a sales agent for 38 homesites within the Great Park Neighborhoods. The fee builder initially incurs all costs to build, market and sell the residential homes, and the Great Park Venture reimburses the fee builder as construction progresses and pays the fee builder certain fees during the construction phase of the homes and when homes are sold to homebuyers. During the six months ended June 30, 2022, the Great Park Venture closed the sales of 22 homes to homebuyers generating $40.5 million in home sale revenues. With the 22 home sales that closed in the six months ended June 30, 2022, all 38 homes subject to the fee build agreement have been sold and closed.
Cost of Home Sales. Cost of home sales includes an allocation of land basis for each home sold in addition to home construction costs the Great Park Venture reimburses to the fee builder and fees paid to the fee builder for the services provided. During the six months ended June 30, 2022, the Great Park Venture recognized $30.8 million in cost of home sales.
Management fee revenues. Management fee revenues are revenues generated by the management company from development management services provided to the Great Park Venture. The decrease in management services related party revenue was mainly attributable to the revised annual compensation structure in place for 2022 per the terms of the 2022 extension of the development management agreement and no variable incentive compensation revenue recognized during the six months ended June 30, 2022.
Management services costs and expenses. Included within management services costs and expenses are general and administrative costs and expenses incurred by the management company’s project team that is managing the development of the Great Park Neighborhoods. We also include amortization expense related to the intangible asset attributable to the incentive compensation provisions of the development management agreement with the Great Park Venture within management services costs and expenses. Corporate and non-project team salaries and overhead are not allocated to management services costs and expenses or to our reportable segments and are reported in selling, general, and administrative costs in the condensed consolidated statements of operations. Management services costs and expenses decreased by $11.7 million, or 70.6%, to $4.9 million for the six months ended June 30, 2022, from $16.6 million for the six months ended June 30, 2021. The decrease was mainly attributable to no intangible asset amortization expense recognized during the six months ended June 30, 2022.
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Selling, general, and administrative. Selling, general, and administrative expenses decreased by $4.2 million, or 26.0%, to $12.0 million for the six months ended June 30, 2022, from $16.2 million for the six months ended June 30, 2021. The lower expense during the six months ended June 30, 2022 was mainly attributable to a decrease in marketing expenses incurred at the Great Park Neighborhoods.
Management fees—related party. Management fees decreased by $9.1 million, or 73.2%, to $3.4 million for the six months ended June 30, 2022, from $12.5 million for the six months ended June 30, 2021. Management fees incurred by the Great Park Venture are comprised of base development management fees and incentive compensation fees. In general, incentive compensation fees will be paid based on a percentage of distributions made to holders of the Great Park Venture’s percentage interests. When payments are deemed probable of being made, the Great Park Venture recognizes the expense ratably over the period services are expected to be provided. When estimates of the amount of incentive compensation probable of being paid change, the Great Park Venture records a cumulative adjustment in the period in which the estimate changes. The decrease in management fees—related party was mainly attributable to the revised annual compensation structure in place for 2022 per the terms of the 2022 extension of the development management agreement and no incentive compensation fees recognized during the six months ended June 30, 2022.
The table below reconciles the Great Park segment results to the equity in earnings (loss) from our investment in the Great Park Venture that is reflected in the condensed consolidated statements of operations for the three and six months ended June 30, 2022 and 2021.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Segment profit (loss) from operations | $ | 1,878 | $ | 70,806 | $ | (193) | $ | 59,885 | |||||||||||||||
Less net income of management company attributed to the Great Park segment | 402 | 1,696 | 1,162 | 3,259 | |||||||||||||||||||
| Net income (loss) of the Great Park Venture | 1,476 | 69,110 | (1,355) | 56,626 | |||||||||||||||||||
| The Company’s share of net income (loss) of the Great Park Venture | 554 | 25,917 | (508) | 21,235 | |||||||||||||||||||
| Basis difference amortization | (347) | (14,049) | (586) | (13,283) | |||||||||||||||||||
| Equity in earnings (loss) from the Great Park Venture | $ | 207 | $ | 11,868 | $ | (1,094) | $ | 7,952 | |||||||||||||||
Commercial Segment
We have a 75% interest in the Gateway Commercial Venture that is held through a wholly owned subsidiary of the operating company, and we serve as the manager of the Gateway Commercial Venture. However, the manager’s authority is limited. Major decisions by the Gateway Commercial Venture generally require unanimous approval by an executive committee composed of two people designated by us and two people designated by another investor. Some decisions require approval by all of the members of the Gateway Commercial Venture. We do not include the Gateway Commercial Venture as a consolidated subsidiary in our condensed consolidated financial statements. However, as a result of our 75% economic interest and our role as manager, we assess our investment in the Gateway Commercial Venture based on the financial information of the Gateway Commercial Venture in its entirety, and we include the Gateway Commercial Venture’s financial results within the Commercial segment. Additionally, the management company has been engaged by the Gateway Commercial Venture to provide property management services to the Five Point Gateway Campus. We include the management company’s results of operations related to these property management services within the Commercial segment.
The Five Point Gateway Campus is a commercial campus consisting of approximately 73 acres of land in the Great Park Neighborhoods acquired by the Gateway Commercial Venture in 2017. The Five Point Gateway Campus currently includes approximately one million square feet planned for research and development, medical and office space in four buildings. In 2020, the Gateway Commercial Venture sold three of the buildings and approximately 11 acres of land at the campus, generating $463.0 million in gross proceeds. Our corporate headquarters are located in the fourth building, which remains owned by the Gateway Commercial Venture. In addition to the fourth building, the Gateway Commercial Venture owns approximately 50 acres of commercial land with additional development rights at the campus.
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The table below reconciles the Commercial segment results to the equity in earnings from our investment in the Gateway Commercial Venture that is reflected in the condensed consolidated statements of operations for the three and six months ended June 30, 2022 and 2021.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Segment profit from operations | $ | 234 | $ | 276 | $ | 449 | $ | 855 | |||||||||||||||
Less net income of management company attributed to the Commercial segment | 101 | 103 | 204 | 202 | |||||||||||||||||||
| Net income of the Gateway Commercial Venture | 133 | 173 | 245 | 653 | |||||||||||||||||||
| Equity in earnings from the Gateway Commercial Venture | $ | 100 | $ | 130 | $ | 184 | $ | 490 | |||||||||||||||
Liquidity and Capital Resources
As of June 30, 2022, we had $127.8 million of consolidated cash and cash equivalents compared to $265.5 million at December 31, 2021. As of June 30, 2022, no funds had been drawn on the operating company’s $125.0 million unsecured revolving credit facility. However, letters of credit of $0.3 million are issued and outstanding under the revolving credit facility, thus reducing the available capacity to $124.7 million.
Our short-term cash needs consist primarily of general and administrative expenses and development expenditures at Valencia and the Candlestick and The San Francisco Shipyard communities, interest payments under our senior notes and payments under a related party reimbursement obligation. Reimbursement payments may be deferred when our related party receives an extension on the maturity date of the associated EB-5 loan liability. Our related party has a history of receiving maturity date extensions, however, such further extensions are not within our control and there can be no assurance that any such extensions will be obtained in the future.
The development stages of our communities continue to require significant cash outlays on both a short-term and long-term basis, and we expect to invest significant amounts on continued horizontal development at Valencia over the next 12 months. We manage our development activities and expenditures to coincide with projected demand for homesites by our guest builders with the objective of maintaining an appropriate level of liquidity. We expect to meet our cash requirements for at least the next 12 months with available cash, in addition to proceeds from land sales in Valencia, distributions from our unconsolidated entities and collection of management fees under our management agreement with the Great Park Venture. The initial term of our development management agreement has been extended by an amendment through December 31, 2022. While we currently expect the development management agreement to be renewed following the expiration of the initial term, as extended, if we are unable to reach agreement on a renewal, or if the terms of any such renewal are less favorable to the company, our short-term cash flows would be negatively impacted. We still expect, however, to be able to meet both short-term and long-term cash obligations with our other sources of cash.
Our long-term cash needs relate primarily to future horizontal development expenditures and investments in or vertical construction costs for properties that we may acquire or develop for our income-producing portfolio, along with debt service and general and administrative expenses. We budget our cash development costs on an annual basis. Budgeted amounts are subject to change due to delays or accelerations in construction or regulatory approvals, changes in inflation rates and other increases (or decreases) in costs. We may also modify our development plans or change the sequencing of our communities in response to changing economic conditions, consumer preferences and other factors, which could have a material impact on the timing and amount of our development costs. Budgeted amounts are expected to be funded through a combination of available cash, cash flows from our communities and reimbursements from public financing, including community facilities districts, tax increment financing and local, state and federal grants. Cash flows from our communities may occur in uneven patterns as cash is primarily generated by land sales and reimbursements, which can occur at various points over the life cycle of our communities.
We currently expect to have sufficient capital to fund the horizontal development of our communities in accordance with our development plan for several years. The level of capital expenditures in any given year may vary due to, among other things, the number of communities or neighborhoods under development and the number of planned deliveries, which may vary based on market conditions. We may seek to raise additional capital by accessing the debt or equity capital markets or with one or more revolving or term loan facilities or other public or private financing alternatives. These financings may not be available on attractive terms, or at all.
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We are committed under various performance bonds and letters of credit (“LOCs”) to perform certain development activities and provide certain guarantees in the normal course of the entitlement and development process.
We had outstanding performance bonds of $325.0 million as of June 30, 2022 predominantly related to our Valencia community.
At June 30, 2022, the San Francisco Venture had outstanding guarantees benefiting a municipal agency for infrastructure and construction of certain park and open space obligations with aggregate maximum obligations of $198.3 million.
Outstanding LOCs totaled $1.3 million at both June 30, 2022 and December 31, 2021. At both June 30, 2022 and December 31, 2021, we had $1.0 million in restricted cash and certificates of deposit securing certain of our LOCs. Additionally, under our revolving credit facility, we are able to utilize undrawn capacity to support the issuance of LOCs. As of June 30, 2022, we were using approximately $0.3 million in capacity under the revolving credit facility to support LOCs.
Summary of Cash Flows
The following table outlines the primary components of net cash (used in) provided by operating, investing and financing activities (in thousands):
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
Operating activities | $ | (133,531) | $ | (117,834) | |||||||
Investing activities | 1,387 | 77,983 | |||||||||
Financing activities | (5,498) | (21,776) | |||||||||
Cash Flows from Operating Activities. Net cash used in operating activities increased by $15.7 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. Major components of operating cash used in both periods consist of our continued investment in horizontal development at our communities and selling, general, and administrative costs and the payment of $24.6 million in each of the six months ended June 30, 2022 and 2021 for interest due on our senior notes.
During the six months ended June 30, 2021, we received incentive compensation payments of $20.7 million under our development management agreement with the Great Park Venture. The payment is net of $0.6 million that we concurrently distributed to the holders of the management company's Class B units.
Cash Flows from Investing Activities. Net cash provided by investing activities decreased by $76.6 million for the six months ended June 30, 2022 compared to net cash provided by investing activities for the six months ended June 30, 2021.
For the six months ended June 30, 2022, we received a distribution of $1.5 million from the Valencia Landbank Venture, which is reflected as a return of our investment in the statement of cash flows. During the six months ended June 30, 2021, we received a distribution of $76.6 million from the Great Park Venture, which is reflected as a return of our investment in the statement of cash flows. Additionally, we received a distribution of $1.0 million from our indirect legacy interest in the Great Park Venture.
Cash Flows from Financing Activities. Net cash used in financing activities was $5.5 million for the six months ended June 30, 2022 compared to $21.8 million net cash used in financing activities for the six months ended June 30, 2021.
We used $2.7 million and $2.0 million during the six months ended June 30, 2022 and 2021, respectively, to net settle share-based compensation awards with employees for tax withholding purposes. For the six months ended June 30, 2022 and 2021, in accordance with the operating company's Limited Partnership Agreement, we made noncontrolling interest tax distributions of $0.4 million and $3.2 million (net of amounts distributable to us as a partner of the operating company), respectively. We also made payments of $2.3 million and $15.9 million to reduce our related party reimbursement obligation during the six months ended June 30, 2022 and 2021, respectively.
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Changes in Capital Structure
During the six months ended June 30, 2022, our ownership percentage in the operating company decreased to 62.5%, primarily due to our reacquisition of approximately 0.4 million restricted Class A common shares from employees for income tax withholding purposes upon vesting and the forfeiture of approximately 0.8 million restricted Class A common shares held by employees that did not vest. Offsetting was our issuance of shared-based compensation in the form of 0.2 million restricted Class A common shares. The issuances, settlements and forfeitures resulted in the operating company issuing to us an equal number of Class A units of the operating company or retiring an equal number of Class A units of the operating company that we previously held.
The table below summarizes outstanding Class A units of the operating company and Class A units of the San Francisco Venture (redeemable on a one-for-one basis for Class A units of the operating company) held by us and held by noncontrolling interest members at June 30, 2022 and December 31, 2021.
| June 30, 2022 | December 31, 2021 | ||||||||||
| Class A units of the operating company: | |||||||||||
| Held by us | 69,068,354 | 70,107,552 | |||||||||
| Held by noncontrolling interest members | 41,363,271 | 41,363,271 | |||||||||
| 110,431,625 | 111,470,823 | ||||||||||
| Class A units of the San Francisco Venture held by noncontrolling interest members | 37,870,273 | 37,870,273 | |||||||||
| 148,301,898 | 149,341,096 | ||||||||||
At June 30, 2022, we had 79,233,544 Class B common shares outstanding that were held by the noncontrolling interest members of the operating company and the Class A unitholders of the San Francisco Venture. The Class B common shares will automatically convert to Class A common shares at a ratio of 0.0003 Class A common shares for each Class B common share. The conversions will occur when the holders of Class A units of the operating company, including Class A units that have been issued upon redemption of Class A units of the San Francisco Venture, are redeemed at our election for our Class A common shares or cash.
Critical Accounting Estimates
There have been no significant changes to our critical accounting estimates during the six months ended June 30, 2022 as compared to those disclosed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is presented in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices and interest rates. Our future earnings, cash flows and fair values relative to financial instruments are dependent upon prevailing market interest rates. Our primary market risk results from our indebtedness, which bears interest at fixed rates. Although we do not currently do so, we may in the future manage our market risk on floating rate debt by entering into swap arrangements to in effect fix the rate on all or a portion of the debt for varying periods up to maturity. This would, in turn, reduce the risks of variability of cash flows created by floating rate debt and mitigate the risk of increases in interest rates. Our objective when undertaking such arrangements would be to reduce our floating rate exposure, as we do not plan to enter into hedging arrangements for speculative purposes.
As of June 30, 2022, we had outstanding consolidated net indebtedness of $619.9 million, none of which bears interest based on floating interest rates.
We have not entered into any transactions using derivative financial instruments or derivative commodity instruments.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the supervision and participation of our Chief Executive Officer and our Interim Chief Financial Officer (the “Certifying Officers”), has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2022. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management, including our Certifying Officers and our Board of Directors, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, the Certifying Officers concluded that our disclosure controls and procedures were effective as of June 30, 2022.
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Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
For disclosures of legal proceedings, see Note 11 to our condensed consolidated financial statements included under Part I, Item 1 of this report, which is incorporated herein by reference.
ITEM 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Part I, Item 1A, Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, which could materially affect our business, financial condition and results of operations. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021. The risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and results of operations.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Mine Safety Disclosures
Not Applicable
ITEM 5. Other Information
None
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ITEM 6. Exhibits
| Exhibit | Exhibit Description | ||||
| 10.1 | First Amendment to Second Amended and Restated Development Management Agreement, dated as of June 10, 2022, by and among Heritage Fields El Toro, LLC, Five Point Communities Management, Inc., Five Point Operating Company, LP and Five Point Communities, LP (Exhibit 10.1 to the Current Report on Form 8-K filed on June 16, 2022 is incorporated herein by this reference) | ||||
31.1* | |||||
31.2* | |||||
32.1* | |||||
32.2* | |||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. | ||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | ||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | ||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | ||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | ||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | ||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | ||||
* Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FIVE POINT HOLDINGS, LLC | ||||||||
By: | /s/ Daniel Hedigan | |||||||
Daniel Hedigan | ||||||||
Chief Executive Officer | ||||||||
(Principal Executive Officer) | ||||||||
By: | /s/ Leo Kij | |||||||
Leo Kij | ||||||||
Interim Chief Financial Officer | ||||||||
(Principal Financial Officer and Principal Accounting Officer) | ||||||||
Date: August 4, 2022
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