Q1 2022 Five Point Holdings LLC Earnings Call
[music].
Okay.
Greetings and welcome to the five points holding LLC first quarter 2022 conference call.
As a reminder, this call is being recorded today's conference May include forward looking statements regarding flash points business financial condition operations cash flow strategy and prospects forward looking.
Statements represent five point's estimates onto teed off this conference call and are not intended to give any assurance as to actual future results because forward looking statements relate to matters that have not yet occurred. These statements are inherently subject to risks and uncertainties. Many.
Many factors could affect future results and may cause five point's actual active.
So our results to differ.
With me from the activity certainly is also anticipated in forward looking statements.
These factors include those described in today's press release, and five Point's SEC filings.
Including in the risk factors section of our most recent annual report included in Form 10-Q filed with the SEC. Please note that five point assumes no obligation to update any forward looking statements.
Now I would like to turn the call over to Dan Harrington Chief Executive Officer. Please go ahead Sir.
Thank you good afternoon, everyone and thank you for joining our call.
I'm joined here today by real key our interim Chief Financial Officer, Mike Alvarado, Our Chief Legal Officer, Greg Williams, Our Chief Policy Officer, and Stuart Miller, our executive Chairman.
I'm very pleased to update you today on the progress of the company for the first quarter of 2022.
I'll also review some of the changes have taken place during the quarter and update you on the steps we've taken towards implementing our strategy going forward.
And Leo will give an overview of the company's financial performance and condition.
We will then open the line for questions to our management team.
Let me start by saying that while rising interest rates and inflation have dominated business news cycle.
And of course, the effect that the broader equity and debt markets in California, Atlanta and housing markets have not lost their strengths.
General shortage of housing supply remains a dominant theme.
Man remained strong driven by higher wages and record low unemployment in spite of higher interest rates.
Against that backdrop, the first quarter represented a pivotal shift in evolution of the company.
<unk> reported a $36 $8 million loss for the quarter, we implemented several measures that we're better positioned five point for the future.
As noted in our earnings release, we recognized approximately $20 million restructuring expenses as we began the process of better manage our costs and creating greater efficiencies in our day to day operations.
At the same time, we're pursuing opportunities to increase revenue in our core land sale business allow us to fortify our balance sheet.
Having entered my first full quarter of C. O five point I'm confident in our path forward and the associates, who are executing on our strategies.
Our five point has a very solid balance sheet, we're looking to strengthen that position as Ron and ever more efficient business.
As we move forward, we are increasing our focus on cost management and increasing cash flow.
Creating the potential to opportunistically pay down debt to further enhance our balance sheets.
The opened five point communities at the Great Park, and Valencia continued to show strength in the current economic environment.
Business in general remains robust and demand is greater than supply.
During the first quarter builders and our Great Park community sold 94 homes. During this quarter the inventory of homes for sale on our only open neighborhood rise was very limited.
Ours is nearly sold out with only about 50 homes remaining to be released by builders at quarter end.
Our new neighborhood called Solar Park of approximately 850 homes and will start pre sales this quarter.
Mato opens homes only for sale this summer.
There are so many will greatly expand available hollister sale at Great Park.
Okay.
And Valencia, New home sales by builders sold 211 homes during the first quarter, bringing the total to 557 homes sold from our opening in May of 2020. One through March of 2022. This sales activity occurred as the initial 15 neighborhoods opened for sale at different times.
With three more neighborhoods opening in the current quarter, we will have 18 active neighborhoods selling in Valencia.
In San Francisco, we're continuing to focus on are reassessing development plan and approval processes, making sure to rationalize cost with yield.
I am pleased by the Swift action and progress we have made to advance our core strategies I want to take a moment to update you on those priorities and where we stand.
Optimization and rationalization of our cost structure was our primary focus this quarter.
During the pandemic five point did not adjust its workforce for retained everyone's employment as part of our people first culture.
As we have now moved beyond the pandemic, we started a comprehensive top down review of the organization and we took the first steps and rightsize our business by affecting a reduction enforce involving 31 associates.
With an additional 15 associates electing to leave the company since the end of 'twenty 'twenty. One we have seen a total head count reduction of approximately 29% of the workforce.
We're continuing to focus on overall operating process refinement. We also look for revenue enhancement opportunities and overall cost management.
I'm personally working with all department leaders and many of their direct reports throughout the company on a regular basis in order to determine among other things how best to deploy our human capital.
These discussions led me to complete an internal reorganization that refocus our operational teams around our three communities with an operational philosophy of empowering the teams and holding them accountable measurable goals.
We continue to strive to accomplish more with less.
As our team moves forward from here, we continue to look for opportunities to create operating efficiency across the company.
Folks on accountability, we're looking to drive bottom line performance drive cash flow and fortify our balance sheet, while building shareholder value.
Our second priority. This quarter has been to continue our work on development plans for the 23 million square feet of plan commercial opportunities in our three communities.
With an active focus at the Great Park in Valencia, we have assembled a team of experts in all of the various commercial property disciplines and have initiated a comprehensive review of the commercial opportunities in day's market.
This review includes expanding our residential programs to include multifamily for rent opportunities.
With our investments in infrastructure and amenities in place and a strong market fundamentals in certain commercial assets. We are seeing increased interest for our commercial land holdings are mixed use zoning allows for multiple users and we believe there are opportunities to rethink conventional approaches to work and retail spaces as we move forward from the prior two.
Years of pandemic and to introduce creative solutions within the evolving commercial market.
As an example, just yesterday, we had a comprehensive meeting with our partners at the Great Park to review progress on our commercial property is execution.
This review daylight at numerous opportunities to reconsider prior plans and drive increased revenue opportunities for the very near future.
Anticipating this will drive greater cash flows in 2023 for the Great Park venture and each there thereafter, which will result in greater distributions to five point.
As a third priority. We are also focused on opportunities to enhance entitlements at our communities to dress California's current housing shortage.
Our communities present, a unique opportunity to fill some of the void of a housing shortage that has been acknowledged as a crisis by the governor.
These units can be for sale or for Red and we are committed to continuing to work with our public partners and community leaders to help address the current shortage, which drives the workforce housing crisis.
Because we have commented before five point is committed to being a leader in building sustainable mixed use communities in California.
Our certified program to deliver a net zero greenhouse gas cleanup Valencia, especially given its size and scale has set the bar high in the states as.
As evidenced by our strong home sales pace, we believe new homeowners are embracing a bunch of community that intentionally preserves natural resources and maximizes energy efficiency.
Over time, working with our local jurisdictions, we expect to enhance and expand our leadership in sustainable community development.
As I've said before it's a priority to move to the development of our San Francisco properties forward.
I have been fully engaged for operational team in San Francisco, We will continue to work in conjunction of our public partners there to get this project back on track.
In summary, our first quarter has been a stepping stone quarter for five point.
We are focused on right sizing, our overhead and rationalize our cost structure enhancing our residential offerings, while at the same time looking to seize upon our commercial opportunities and enhance our commercial revenue.
I remain optimistic about both the short and long term future of the company, but the realization that we are in a dynamic market and we need to always remain proactive and focused on overall economic conditions.
In particular, we are monitoring the impact of rising interest rates and inflation on buyer demand in housing.
I expect that these factors will impact the housing market nationally. We're continue to see strong demand in our markets and still anticipate fourth quarter 2022 sales to builders are approximately 350, homesites at Valencia, and 850 homes sites at the Great Park.
All of which will further our cash flow fortify our balance sheet and drive long term shareholder value.
Now, let me turn over to Leo who will report on our financial results.
Thank you Dan.
A summary of our financial results was included in the earnings release issued earlier today.
And our first quarter 10-Q has been filed with the SEC and is available for review on our website.
The consolidated results for the first quarter are as follows.
Our net loss for the quarter was $36 8 million, which includes $16 8 million and selling general and administrative expenses.
1 million and losses from our unconsolidated entities and a $19 4 million restructuring charge comprised of $18 5 million related to executive management restructuring activities and 900000 related to estimated severance benefits.
The executive management restructuring activities included the appointment of Dan had again as our Chief Executive Officer on February nine.
And Lynn Yocum subsequent transition from President and Chief operating officer to an advisory role pursuant to a three year advisory agreement.
This resulted in a change to the management structure that was put into place in the fourth quarter of last year, when our meals <unk> transitioned from his role as chairman and Chief Executive Officer, and President to senior adviser and then Yoakum was appointed as President.
Our advisory agreements with the meal and land remain in place through each respective term.
After considering these changes and the applicable accounting guidance, we accrued a related party liability of approximately 15, and a half million attributed to future retainer payments that we will make to our meal and land.
We also recognized $3 million and an additional restructuring costs associated with their unvested restricted share awards that became that will that become unrestricted upon vesting dates in January 2023 and 2024.
In addition to our executive management restructuring activities and as Dan mentioned previously.
We have seen an approximately 29% reduction in head count since the end of 2021.
Most of the reductions were the result of a company wide layoffs that occurred at the end of the first quarter.
At March 31, we accrued 900000 in restructuring cost for estimated severance benefits from these layoffs.
While there were no land sale closings during the quarter, we continued to invest in inventory, which increased by $47 9 million and was primarily related to land development activities and Valencia.
Our cash balance at the end of the quarter with $204 million and we had no outstanding borrowings under our 125 million unsecured revolving line of credit.
Our debt to total capitalization ratio was stable at 25, 1% and our net debt to capitalization ratio when taking into account our cash balance was 18, 4%.
Moving to segment results for the first quarter the.
The company has four reporting segments, Valencia, San Francisco, Great Park and commercial.
Results for the first quarter are as follows.
The Valencia segment is consolidated for accounting purposes. The segment loss was $4 8 million for the quarter.
There were no landfill clothing, and Valencia during the quarter and selling general and administrative costs were comprised of selling and marketing expenses in support of our first development area as well as general and administrative costs incurred to support the segment's operations as we work towards closing anticipated fourth quarter builder.
Land sales.
The San Francisco segment is consolidated for accounting purposes, and recognized a $700000 loss for the quarter.
This loss is comprised of general and administrative costs incurred to support the segment's operations as they focus on reassessing the development plan and approval process for our San Francisco assets.
Next the Great Park segment that reports the operations at the Great Park venture, which is the owner of the Great Park neighborhoods as well as management services provided to the venture by a five point management company.
We own 37, 5% of their percent interest of the venture and 100% of the management company.
The Great Park segment reports the full results of the Great Park venture are investment in the venture is accounted for under the equity method of accounting.
And therefore, the assets liabilities and results of operations and cash flows of the venture are not consolidated within our financial statements.
The Great Park venture is a self funding operation with no debt and had a cash balance of $127 million at the end of the quarter.
Great Park segment revenues were $22 4 million, which primarily consisted of $17 2 million related to the closing of nine homes under the Great Park venture the build program and management fee revenues of $3 4 million recognized by the management company for services provided to.
The venture.
There were no land sale closings at the Great Park in the first quarter.
The profit recognized by the fee build homes sales of $4 3 million was more than offset by the that youre selling general and administrative expenses of $7 6 million, which are mostly comprised of selling and marketing costs incurred in support of home sales at the venture including the next neighborhood planned to open for sale. This summer solus part.
The remainder of expenses related to general and administrative costs incurred to support the venture's operations as we work towards closing anticipated fourth quarter builder land sales.
Overall, the Great Park segment had a net loss of $2 1 million for the quarter, which was comprised of approximately 700000 in income from the management company and a $2 8 million law.
From the venture's operations.
The company's equity and loss from the great part venture after adjusting for.
The difference in investment basis for the $1 3 million.
Our commercial segment reports the operations of the Gateway commercial venture and management services provided by five point management company debenture, we own 75% of the gateway commercial venture and 100% of the management company our investment in the venture is accounted for under the equity method of accounting and therefore the <unk>.
Assets liabilities cash flows and results of operations of the venture are not consolidated within our financial statements.
Commercial segment income was 215000 for the quarter, which included 103000 for the management company and 112000 from the operations of the Gateway commercial venture.
<unk> equity in earnings from the Gateway commercial venture was 84000.
That I will turn it over to the operator for questions.
Okay.
Thank you, ladies and gentlemen, if you would like to ask a question. Please see note by pressing star one on your telephone keypad.
If you're using a speaker phone. Please make sure your mute function is off to a long as seen it to reach our equipment.
Press Star one to ask a question.
We take our first question from and then Ratner with Zelman and Associates. Your line is open. Please go ahead.
Hey, guys. Good afternoon, thanks for taking my questions.
Dan I guess first question on you know all the actions you guys took I guess towards the end of the quarter. There on on the restructuring efforts I know, that's a certainly not not fun, but I guess just thinking through the go forward impact. There do you guys have an estimate just in terms of potential cost savings that you know I know your SG&A rates been kind of a.
Running at about $20 million a quarter over the last couple of years, so any any estimate where that might go given these actions you guys Doug.
I think Leo can answer that.
We all can answer that question I think you were looking at that first one yeah.
Yeah.
We would look at as a reduction in our cash payroll costs.
Annualized to the company of approximately $9 million.
Perfect.
And assuming all of that would be would have been flowing through the SG&A line before.
Correct, Okay, great I appreciate that.
Now in your write down that Alan that wasn't it wasn't fun, but you know it was very strategic and we think important for the company.
Sure I think it certainly makes sense makes sense given the environment and.
Kind of the go forward look here so.
Dan I know you mentioned.
As far as home sales activity is concerned that you hadn't really seen any impact from the move in rates in all of the stock market volatility.
The thing that you know that those comments were kind of through the quarter.
It seems like the last couple of weeks, maybe theres been kind of a another level of volatility that's kicked in and maybe some <unk>.
Some chatter that things maybe have turned a little bit more in the housing market in terms of traffic starting to wane and maybe just.
Just overall buyer fatigue here. So could you just clarify what timeline youre, referring to in those comments and then whether or not you have seen any shifts either from the homebuyer side or from the homebuilder side as far as maybe becoming a bit more conservative here over the last two or three weeks.
Well I would tell you that we have not seen a slowdown in our sales base now Valencia, which has a lot of programs, we're kind of seeing consistent.
Sales there you know obviously at Great Park, we were down to some just the very end of the inventory and builders are slowly letting it out as they wait for the new communities open up we haven't seen anything there.
We actually are.
Our in contact obviously with the builders because of another offering going out and everyone's still is very enthusiastic about buying land. So we're not seeing it once again, we do know that it's important to kind of keep heads up.
But right now it's right now we're not seeing it okay, that's great to hear.
If I can sneak in just a third question here Dan one of the things you mentioned that youre looking at or potentially trying to do here is actually pay down debt and I was a little surprised at that only because just kind of knowing where you guys are as a company in your life cycle.
Assume that at some point here, you would hope to get San Francisco up and running off the ground, which is likely going to require some cash investments at least upfront you mentioned, some commercial projects and assets and I'm not sure whether that would be done and more joint venture or kind of off balance sheet.
Can you just kind of talk through a little bit how you see the cash flow trending over the next call. It two to three years, because we've been under an impression that yeah as.
San Francisco kind of ramps up whenever that might happen that you might be looking at another another year or two of you have pretty decent cash outflows, but it sounds like you're you're assuming maybe the opposite.
Well see you in San Francisco, you know I'm once again I'm still getting my head a lot around San Francisco. So that's not that's not really in play at this moment.
So it's not something that we're looking at a current cash flows we need to really.
You kind of finalized really the process and what we're doing up there.
Otherwise you know.
We're going to be very proactive in managing our cash so when I really say that it's because we when are we watching our cash very carefully and how we spend it and I think that that hopefully supports all of our efforts that we're trying to achieve going forward.
Got it okay. Good to hear I appreciate it guys. Good luck.
Yeah.
Thanks Alan.
Once again, ladies and gents I Wonder if you would like to ask a question. Please send them by pressing star one on your telephone keypad.
We take our next question from Ken Hanson with Stifel. Your line is open.
Go ahead.
Thank you.
Good afternoon.
For full disclosure all chartered financial analyst.
At Stifel I'm, not representing the firm in this discussion I'm actually shareholder My 60000 shares are bought about a year or two years ago now.
And during that time period of course.
We've had now three people leading this discussion here the latest Dan.
I'm, hoping it's a harbinger of good things to come but what I want to know is I missed something in my analysis. The first time around and my initial purchase.
I'm wondering from what you're seeing.
What what was the a mistake on my part is it that the capital structure is too complex at legacy holders that needed to be paid out rate of sales is too slow costs are too high what happened in the last two years that made.
Five point not look like the builders and the builders success over that same time period.
Yeah.
You know.
We have we have great assets again, so I can tell you that I've spent a bunch of time on all of them in the last 90 days and but it's going to take time and I think the the.
Issue here is we need to be in the lead time to execute on all of them, but theyre great assets. So.
Yeah, I'm not quite sure how you can take any more information about your initial underwriting but loved the assets.
Yeah, and I guess, that's what's.
A bit puzzling is that the underlying assets I would agree are world class and so.
Something has happened.
Between the acquisition of these world class assets and know that hasn't benefited the common shareholder and you know this is the first time I think I've heard anybody say.
To build shareholder value prior to that I think the people first culture may have lent itself to orientation around other things but.
<unk>.
I'm glad to hear that the shareholder value is of importance, but I'm just wondering why these world class assets so far haven't.
Filtered down to any appreciable.
Consideration to the common shareholders.
Well you know maybe it off [laughter], asking really get the market, which I can't speak to the market, but California assets really take time to achieve their value California's a long, it's a long game and the state.
And with the.
You talked about the enhanced residential opportunities at Great Park.
That was mentioned I think in a previous call where are you on that and what's the probability of success in doing that and what do you think.
The eventual.
Result will be.
Well that that is actually a work in progress and work that we're studying.
I'm not sure if you're in California, or not but there was a very active program in California called Arena, the regional housing needs assessment.
That gives us opportunities are at the Great Park for additional residential but that is a that's a deep study we're into right now so I really couldnt give you.
Answer, but yet, but that's what drives it all really the Reno process in California.
And one last question.
Your appointment.
Obviously it was it was meant to do a certain thing and the direction of the company I'm just wondering from your.
Perspective, what's the skill set that.
And you are bringing to the team.
That's maybe different than the others are oriented differently or can make.
Shareholders like me confidence that we're on the right track.
You know I think you know Kim.
I bring 32 years of experience in the neighboring community.
You know the Irvine ranch.
And I have deep deep experience in.
Residential development residential land sales.
And I've also worked closely with teams of people in the commercial side in my past life. So you know what I'm. Just you know there was a huge lift to get this rolling.
And I'm really just now here to kind of to continue on our path.
I've really kind of executing and taking all those years of experience.
Yeah. One last comment is is there any way.
This was brought up in the.
Meeting or one of these conference calls a couple of times back is there any way that.
He was CFO can help investors appreciate.
The true value of the underlying assets that you do hold I mean, if I'm a resident of Irvine My.
My office looks down on your property one of the Great Park.
Blackberry building, so I see that asset, but I don't think other people.
I can appreciate what that represents and maybe it's because it's.
There are too many parties involved and they can't get a handle on what the what the dollar amount would mean.
If completely developed and built out that in addition to your other properties. So is there any way the CFO can come up with a net asset value that says given what we know about.
The opportunities here. This is the range of valuation that we see.
You know, Ken that's not something we're prepared or in a position to do.
Okay fair enough. Thanks, so much for the time, we appreciate it.
All right Ken Thank you.
And again, ladies and gentlemen, it is star one to ask a question star one to ask a question.
It appears there are no further question at this time I'd like to turn the call back to you for any additional or closing remarks.
Well, thanks, everyone for joining us today.
So long.
Yeah.
Thank you that concludes today's call. Thank you for your participation you may now disconnect.
Yeah.
[music].