Earnings Call Transcript - FPH Q3 2022

Operator, Operator

Greetings and welcome to the Five Point Holdings LLC Third Quarter 2022 Conference Call. As a reminder, this call is being recorded. Today's conference may include forward-looking statements regarding Five Point's business, financial condition, operations, cash flow, strategy and prospects. Forward-looking statements represent Five Point's estimates on the date of this conference call and are not intended to give any assurance to the actual future results. Such forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could affect future results and may cause Five Point's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors included those described in today's press release and Five Point's SEC filings, including those in the Risk Factors section. Five Point's most recent annual report on Form 10-K filed with the SEC. Please note that Five Point assumes no obligation to update any forward-looking statements. And now, I would like to turn the call over to Mr. Dan Hedigan, Chief Executive Officer. Please go ahead.

Dan Hedigan, CEO

Thank you. Good afternoon, everyone, and thank you for joining our call. I have with me today Leo Kij, our Interim Chief Financial Officer; Mike Alvarado, our Chief Legal Officer; and Kim Tobler, our Vice President Treasurer and Tax. Stuart Miller, our Executive Chairman, is joining us remotely. I'm pleased to update you today on the progress of the Company through the third quarter of 2022. I will also update you on our team's focus during the quarter and on the steps we have taken towards implementing our strategies. Next, Leo will give an overview of the Company's financial performance and condition. We'll then open the line for questions to our management team. Let me begin by saying that our third quarter results reflect the hard work and determination of our strong team as they focus on managing through what is becoming a very difficult market cycle. While the third quarter was a tough quarter for our primary residential land sale business, given the changing market conditions, our team executed efficiently and effectively by focusing on limiting our cash spend and managing costs, resulting in a net loss of $9.5 million. During the quarter, the Federal Reserve raised interest rates at the most aggressive pace since the early 1980s. Cash costs caused our homebuilder customers to rebalance their home pricing and sales pace assumptions, which directly impacted our land acquisition timing and values. We'll remain very close to our homebuilding partners, and our focus on working with them to meet their needs is to support their continued purchase of residential land. Nevertheless, in our California markets, housing is still in short supply, and there remains demand for well-located homes in master plan communities. It will take some time for the housing market to reset on both the homebuyer and homebuilder sides of the market, but land does not support. We intend to be patient and to manage our business to the reality of the market at this moment in time. We're still negotiating with homebuilders for land sales in our communities, and while we may need to look at our transaction structure and product offering, we expect that homebuilders will still be buyers in this market. To that end, we'll be looking to work with them to sell land at market prices, balancing current market conditions with the scarcity of entitled land inventory in our markets. Our residential land sales have slowed in response to those market conditions. We remain optimistic and moving forward with our unique and limited supply of commercial land sale offerings at the Great Park in Valencia. With historically low vacancy rates and industrial properties, coupled with record rent growth and a limited supply of undeveloped land, we remain confident that these offerings will garner interest in our markets for not only industrial uses but for other uses as well. In many instances, we have the only entitled and redeveloped commercial industrial land of its kind in the market. At the Great Park, we're actively marketing approximately 80 acres recently posted for sale. In the context of these challenging market conditions, we're disappointed that S&P downgraded the rating of our debt. I look forward to sitting with the rating agencies to better communicate the elements and composition of our business and provide a comprehensive understanding of the strong position of our balance sheet. Currently, our balance sheet retains its low leverage with a 25.3% debt to total capital ratio. We have no debt due in 2023 or 2024 as we weather the current market conditions, and we feel confident that our strong residential and commercial land positions will retain their value. As I said last quarter, everything at Five Point today starts with our strategy of doing more with less. We feel strongly that this model of efficiency will carry the Company through the current real estate cycle. While the land and homebuilding markets are in transition, we'll be focusing our attention on managing our cost of doing business. These efforts and our reduction in force earlier this year have now resulted in approximately 42% reduction in our expenses compared to the same quarter last year. We continue to focus on managing our operating costs while carefully managing the deployment of capital across our communities, ensuring that capital matches near-term revenue opportunities. Our strong communities and our unique product offerings are complemented by a balance sheet that enables us to maximize value with patient offerings to allow us to match the right offerings with the right purchaser. At quarter end, our balance sheet reflected $86 million of cash on hand and $0 drawn on our $125 million revolver, giving us available liquidity of $211 million. As noted earlier, we also have no debt repayment obligations in 2023 or 2024. While Five Point maintains a conservative leverage balance sheet, we're looking to strengthen that position as we run an ever more efficient business. We're maintaining our focus on cost management and on increasing cash flow, with particular focus on carefully matching land development capital deployment with residential and commercial land sale execution in order to create more revenue with less cash deployed. Again, our strategy is to produce more with less. Five Point is driving efficiency in every part of our business. Now let me turn to our civic community review. At the Great Park, the open Five Point communities continue to sell homes, but at somewhat reduced absorption rates. As has been observed in prior new home sales slowdowns, coastal California holds up better than other markets, and that is what we're seeing in our communities. During the third quarter, with the expansion of offerings in Solis Park, our newest community, we sold 82 homes, up from 37 homes in the first quarter. Solis Park, which includes 849 homes, had the first model complex opened in July, and the balance of the neighborhoods are planned to open between late August and November. These homes will greatly expand the number of available homes for sale at the Great Park. Last quarter, we discussed our initial homebuilder bids in our next residential community, District 5-South. This is not a marketing name; it's how we describe it. District 5-South is a community of 719 homes across 11 neighborhoods. We reported accepting bids on 8 of the 11 neighborhoods in the offering, anticipating year-end closings. During the third quarter, many of the builders paused their land purchases and we currently anticipate only closing two of these neighborhoods before year-end. Additionally, we expect to move forward with two neighborhoods in our Rise community, which should close before year-end. We're continuing our conversations with several builders as many have indicated they would like to reengage after year-end. We do not anticipate contracting any additional neighborhoods this year. Our projected Great Park land closings are approximately 253 home sites for the year versus last quarter's projection of approximately 660 home sites, and we are in the process of selling the remaining home sites into 2023 and possibly some into 2024. On top of the ongoing residential opportunities at Great Park, our commercial parcels will offer to the Orange County commercial market something that has not been available for years: large parcels of entitled land with flexible zoning that allows for a multitude of uses including life sciences, R&D, office, and industrial among others. The majority of these commercial parcels are near City of Hope's recently opened comprehensive cancer center and the future dedicated cancer hospital, which broke ground last quarter. We anticipate that their presence will be synergistic and create additional demand for users and occupiers in the medical and life sciences market. These unique attributes create great opportunities for Great Park Venture, which we will handle patiently in order to drive top-line revenue and maximize the bottom line. Perhaps most importantly, in our Great Park community review, with a strong spirit of cooperation between the City of Irvine and the Great Park Venture, we are advancing our public-private partnership by entering into arrangements that are designed to advance the development of Great Park, for which the community was defined. With these types of civic engagements, we believe it is our civic responsibility to work with the City of Irvine to advance its goals, particularly with respect to the Great Park. We also believe all these ongoing efforts will drive greater cash flow in 2023 for the Great Park Venture, and each year thereafter, which will result in greater distributions to Five Point. In Valencia, new home sales by builders totaled 166 during the third quarter, down two homes from the second quarter. Valencia has now sold a total of 891 homes out of 1,268 home sites in our first 18 neighborhoods, from our opening in May of 2021 through September of 2022. We now have 8 open neighborhoods as 10 communities have been sold out. Our guest builders have closed 636 homes at this point, creating a very vibrant and growing community. They are also actively working on their models for the next new home area of Valencia, which encompasses an additional 8 new neighborhoods and 598 homes. These neighborhoods are expected to open in the second and third quarters of next year. We are also looking at our planned home site sales in Valencia in the fourth quarter this year to better match the current sales pace and market demand. Last quarter, we decided to reduce our anticipated lot sales to approximately 160 home sites, focusing on more traditional lots. We are continuing to review the sale of these lots with our homebuilders to ensure it is an appropriate time to bring them to market. As the master developer, we feel it's important to continue to monitor the market and work toward the sales success of all neighborhoods in the community. If we do not proceed with these 160 homes in the fourth quarter, they will move into 2023. In addition to all our commercial opportunities at Valencia, we're also actively looking to add multifamily opportunities for a mix of land offerings. Multifamily is a strong real estate segment that could provide housing options for residents as well as land sales revenues for us, even during times when the for-sale residential market is under pressure. We're committed to continuing to work with our public partners and community leaders to help address the current housing shortage, as more housing opportunities will help there. San Francisco remains a priority for Five Point and for the city and county of San Francisco. It represents irreplaceable land along San Francisco Bay, with a broad mix of approved development opportunities. We're actively engaged in the process to understand how the current titles can be rebalanced to allow Candlestick to move forward ahead of the Hunters Point Shipyard site, while maintaining the overall community development mix. Working with our public partners, and using our experience and lessons learned from our planned communities, we continue to review the various options to initiate development in San Francisco, including how best to leverage the tax increment financing available to the project. San Francisco will remain a work in progress as we work through these issues, but it is a project we are focused on and to which we are fully committed. In summary, our third quarter has been challenging for the entire industry, and we are well aware of the headwinds we are facing in the current environment. We continue to make progress on Five Point's core objectives. We are moving forward on our strategies and feeling increasingly optimistic about our future. Optimization and rationalization of our cost structure is an ongoing focus. We continue to concentrate on our strategy of doing more with less. We are constantly searching for opportunities to create operating efficiencies across the Company. With a focus on accountability, we aim to drive bottom-line performance, enhance cash flow, and fortify our balance sheet while building shareholder value. We are refining our residential offerings while, at the same time, looking to seize upon our commercial opportunities and enhance our commercial revenue. While we expect some short-term disruption in our core land sale business, we remain optimistic about the long-term future of our company. As we did this quarter, we'll continue to monitor the impact of rising interest rates and inflation on buyer demand for housing, and we'll adjust our plans proactively to maintain the value of our master plan communities. Of course, we are focused on our conservatively leveraged balance sheet. As we generate cash, we'll look to consistently strengthen the balance sheet to remain prepared for the future. Let me turn it over to Leo, who will report on our financial results.

Leo Kij, Interim CFO

Thank you, Dan. A summary of our financial results includes the earnings release issued earlier today, in which we reported a consolidated net loss of $9.5 million for the quarter. While no land sales were closed, we did recognize $15.4 million in revenue that was mostly generated by our Valencia and management company operations. Selling, general and administrative expenses were $12 million, which is consistent with the prior quarter and represents a reduction of 42% compared to the same quarter last year. The decrease is primarily the result of our reduction in headcount as reported during our first quarter earnings call. As Dan previously mentioned, total liquidity was $211 million at quarter end and is comprised of $86.3 million of cash and cash equivalents and $124.7 million of available borrowing capacity under our revolving credit facility. No amounts were drawn on our $125 million revolver; however, letters of credit of approximately $300,000 are issued and outstanding under the facility. Our debt to total capitalization ratio was stable at 25.3%, and our net debt to capitalization ratio, after taking into account our cash balance, was 22.6%. The Company has four reporting segments: Valencia, San Francisco, Great Park, and Commercial. Segment results for the third quarter are as follows: the Valencia segment recognized a $543,000 loss for the quarter. There were no land sale closings in Valencia; however, the segment did report revenue of $3.1 million. Most of this revenue related to changes in estimates of variable consideration from the amounts previously recorded on prior land sales, which includes profit participation that we collect from our homebuilders. Segment revenue was offset by selling, general and administrative costs of $2.5 million that were mostly comprised of employee compensation costs as well as selling and marketing expenses in support of our development areas. The San Francisco segment recognized a $673,000 loss for the quarter. This loss is comprised of general and administrative costs incurred to support the segment's continued focus on reassessing the development plan and approval process for our San Francisco assets. Our Great Park segment reported a loss of $13.8 million for the quarter, which was comprised of $4.5 million in income generated by our management company and an $18.3 million loss from the venture's operations. As a result of the management company, Five Point recognized $12 million in management fee revenues during the quarter, $3 million of which was from monthly base fee payments, and $9 million of which was from non-cash revenue recognized for changes in estimated incentive compensation payments expected when the venture makes future distributions. Offsetting these revenues were expenses of $7.5 million, which were comprised of $2.1 million for the cost of providing management services, primarily project team compensation, as well as $5.4 million for amortization expenses associated with our development management intangible assets. The Ventures operations recognized revenue of $35.2 million during the quarter. This included $23.9 million of proceeds from the closing of 61 home sites on 2.9 acres at the Great Park neighborhoods, as well as $11.3 million related to changes in estimates of variable consideration, which is mostly comprised of profit participation the venture receives from homebuilders. Offsetting these revenues were costs of land sales of $15.1 million, SG&A of $3.7 million, and related party management fee expenses of $35.3 million. Management fee expense was comprised of $3 million of monthly base fee payments and a $32.3 million increase in accrued incentive compensation resulting from a change in the estimate of aggregate payments probable to be made as the venture makes future distributions. We own a 37.5% interest in the Great Park Venture and 100% of the management company. Although the Great Park segment reports the full results of the Great Park Venture, our investment is reported under the equity method of accounting; therefore, the assets, liabilities, results of operations, and cash flows of the venture are not consolidated within our financial statements. The Company's equity loss from the Great Park Venture, after adjusting for basis differences, was $4.5 million for the quarter. The Great Park Venture is a self-funding operation with no debt and had a cash balance of $129 million at the end of the quarter. Our Commercial segment broke even for the quarter, which included a $100,000 loss from operations of the Gateway Commercial Venture and $100,000 in income from services provided by our management company. During the quarter, the venture extended the maturity date of its $29.4 million mortgage and mezzanine loan facilities to September 2023. The venture is a self-funding operation and had a cash balance of $14.8 million at the end of the quarter. We own 75% of the Gateway Commercial Venture and 100% of the management company. Our investment in the venture is reported under the equity method of accounting; therefore, the assets, liabilities, cash flows, and results of operations of the venture are not consolidated within our financial statements. Five Point's equity loss for the quarter from the Gateway Commercial Venture was $87,000. With that, I'll turn it over to the operator for questions.

Operator, Operator

Thank you. Our first question comes from Dominick D'Angelo with O'Keefe Stevens Advisory. Please go ahead.