Q3 2022 Five Point Holdings LLC Earnings Call
Okay.
Great.
Today's conference.
Yeah.
Regarding site.
Financial condition.
Cash.
Alright.
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<unk> estimates.
Yeah.
Yeah.
Forward looking statements.
These statements are inherently subject to risks and uncertainties.
Yes.
These factors could affect future results.
Actual activities.
Some of the activities and results.
Yes.
As described in today's press release.
Yeah.
And the risk factors.
Five.
Annual report on Form 10-K filed with the SEC.
Note that five.
No obligation to update any forward looking statements.
I'd like to turn the call.
Please go ahead.
Thank you.
Good afternoon, everyone and thank you for joining our call.
I have with me today, well key our interim Chief Financial Officer, Mike Alvarado, Our Chief Legal Officer, and Kim told you, our vice President Treasury 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 teams focused during the quarter and on the <unk>.
We have taken towards implementing our strategies.
Next Leo will give an overview of the company's financial performance and condition.
Well 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 the termination of our strong team.
We focus on managing through what is becoming a very difficult market cycles.
Well 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 while focusing on limiting our cash spend and managing costs.
And in the quarter with a net loss of $9 $5 million.
During the quarter the federal reserve raised interest rates to most aggressive pace since early 19 eighties.
That has caused our homebuilder customers to rebalance their home pricing and sales pace assumptions.
It's directly impact our land acquisition timing and values.
We have remained 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 lots.
Yeah.
Nevertheless, in our California markets housing is still in short supply and there is still demand for well located homes and master planned communities.
It will take some time for the housing market to reset on both the homebuyer and home builder side of the market, but land does not spoil.
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.
Specced at 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 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 rapid rent growth and a limited supply of undeveloped land.
We remain confident that these offerings will garner interest in our markets not only industrial users, but for other uses as well.
In many instances, we have the only entitled and ready to go commercial industrial out of its kind in the market.
At the Great Park Youre actively marketing approximately 80 acres, we recently listed for sale.
In the context of these challenging market conditions, we are disappointed S&P downgraded to a rating of our debt.
We look forward to sitting with the rating agencies to better communicate the elements and composition of our business and to 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 'twenty three 'twenty four.
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 are doing more with less operating strategy.
Feel strongly that this model of efficiency will carry the company through the current real estate cycle.
While the land in homebuilding markets are in a transition we'll be focusing our attention on managing our cost of doing business.
These efforts and a reduction in force earlier this year.
Have now resulted in approximately 42% reduction of our expenses over the same quarter last year.
We're continuing to focus on managing our operating costs at the same time carefully managing the appointment of capital across our communities be sure the capital matches near term revenue opportunities.
Our strong communities our unique product offerings are complemented by a balance sheet that enables us to maximize value with patient offerings.
Allows 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 dollar revolver.
Available liquidity of $211 million.
As I noted earlier, we also have no debt repayment obligations and 'twenty 'twenty three or 'twenty four.
By five point maintains a conservative leverage balance sheet, we're looking to strengthen that position as you run an ever more efficient business.
We're maintaining our focus on cost management, and an increasing cash flow.
A particular focus on carefully matching land development capital deployment to 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 specific community review.
Okay.
At the Great Park, the opened five point communities continue to sell homes, but it somewhat reduced absorption rates.
S. Abbott has been the pattern in prior new home sales slowdowns.
Coastal California holds up better than inland markets and that is what we're seeing at our communities.
During the third quarter with the expansion of offerings in solar Park, our newest community builders.
Everyone have a great Park community sold 82 homes up from 37 homes in the first quarter.
So let's park with a dinner forty-ninth all homes had the first model complex opened in July the balance of neighborhoods panned up in late August through November .
These all means are greatly expanding available homes for sale at the Great Park.
Hum.
Last quarter, we discussed our initial homebuilder beds in our next residential community district five south.
Which is not a marketing name is how we describe it.
District, five SaaS, a community of 719 homes and 11 neighborhoods.
Our reported accepting bids on eight of the 11 neighborhoods and the offering anticipating yearend 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 anticipate moving forward with two neighborhoods in our rise community, which should close before year end.
We're continuing our conversation with a number of the builders as many have indicated they would like to reengage after year end.
We do not end up contracting any additional neighborhoods. This year I anticipate at Great Park land closings are projected to be approximately 253 homes sites for the year versus last quarter's projection of approximately 660 homesites.
And we will push the sale of the remaining home sites into 2020, three 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, a flexible zoning that allows a multitude of uses including life Sciences, R&D office and industrial among others.
Majority of these commercial parcels or near city of hopes recently held a comprehensive cancer center and the future dedicated cancer Hospital, which broke ground last quarter.
We anticipate that their presence will be synergistic with and create additional demand for users and occupy occupiers in the medical and life Sciences market.
These unique attributes create great opportunities for your great part.
Venture, which we will be patient with in order to drive topline 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're advancing our public private partnership by near term arrangements that are designed to advance the development of Great Park.
Of which the community was defined.
These types of civic engagements are what make cities and local communities thrive that is our civic responsibly to work this saberbein to vantage goals, particularly with respect to the Great Park.
We also believe all of these ongoing efforts will drive greater cash flow in 2020 three for the Great Park venture and each year thereafter, which will result in greater distributions to five point.
And Valencia, New home sales by builders totaled 166 during the third quarter down two homes from the second quarter.
Russia is now sold a total of 891 homes out of 1200, six eight homesites in our first 18 neighborhoods.
Tom.
And this is from our opening in May of 2021 through September of 2022.
We now have eight often neighborhoods as 10 communities had been sold out.
Our guest builders of close 636 homes at this point could be a very vibrant and growing community.
We're also actively working on their models for next new home area of lunch at which it comes as an additional eight new neighborhoods and 598 homes.
These neighborhoods are expected to open in the second and third quarters next year.
We've also been looking at our planned homesite sales in Valencia in the fourth quarter of this year to better match current sales pace and market demand.
Last quarter, we decided to reduce our anticipated lot sales approximately 160 homesites folks in a more traditional watch.
We're continuing to view the sale of these lots with our homebuilders b shares of Pope 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 in all the neighborhoods and the community.
We do not proceed with these 160 homes in the fourth quarter, they will move into 2020 three.
In addition to our commercial opportunities at Valencia.
We're also actively looking to add multifamily opportunities for a mix of land offerings.
Multifamily is strong real estate segment that could provide housing options for residents in land sales revenues for us even during times when the forest that 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 and.
And more opportunities more housing opportunities will help there.
San Francisco remains a priority for five point and for the city and county of San Francisco.
It is irreplaceable land, along the San Francisco Bay, with a broad mix of approved development opportunities.
We're actively engaged in a process to understand how the current entitlements can't 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 other plan communities.
We continue to review the various options to initiate development in San Francisco.
Including how best to leverage the taxes and financing is available to the project.
San Francisco remain a work in progress as you work through these issues, whereas the project we are focused on into which we are fully committed.
In summary.
On the 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 can continue to make progress of five points core objectives.
We're moving forward on our strategies and feeling ever more optimistic about our future.
Optimization and rationalization of our cost structure is an ongoing focus.
We continue to focus on our strategy of doing more with less.
Constantly searching for opportunities create operating efficiencies across the company.
With a focus on accountability, we're looking to drive bottom line performance drive cash flow.
And fortify our balance sheet, while building shareholder value.
We're refining our residential offerings.
At the same time looking to seize upon our commercial opportunities and to enhance our commercial revenue.
While we expect some short term disruption in our core land sale business.
Main optimistic about the long term future our company.
As we did this quarter will continue to monitor the impact of rising interest rates and inflation on buyer demand for housing and we'll adjust our plans proactively.
Maintain the values of our master planned communities.
And of course, we are focused on are conservatively leveraged balance sheet.
As we generate cash we'll look to consistently strengthened balance sheet to remain prepared for the future.
Now, let me turn it over to Leo who report on our financial results.
Thank you Dan Sommer.
Summary of our financial results is included in the earnings release issued earlier today, and which we reported a consolidated net loss of $9 $5 million for the quarter.
While no landfills, we're close we did recognized $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 head count 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.
$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 $300000, our 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.
NCS, San Francisco, Great Park and commercial.
Segment results for the third quarter are as follows.
The Valencia segment recognized a $543000 loss for the quarter.
There are no land sale closing in 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 cost as well as selling and marketing expenses in support of our active development areas.
San Francisco segment recognized $672000 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.
Great Park segment reported a loss of $13 $8 million for the quarter, which.
Which was comprised of $4 5 million and income generated by our management company and an $18 3 million dollar loss from the venture's operations.
As a result to the management company five point recognized $12 million in management fee revenues during the quarter three.
3 million of which was from monthly base fee payments and 9 million of which was from noncash revenue recognized for changes in estimated incentive compensation payments expected when the adventure 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 expense associated with our development management intangible asset.
Debentures operations recognized revenue of $35.
$2 million during the quarter.
This included $23 9 million of proceeds from the closing of 61 Homesites 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 debenture receives from homebuilders.
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Offsetting these revenues or cost of land sales at $15.1 million SG&A of $3 7 million and related party management fee expense of $35 3 million.
Management fee expense is comprised of 3 million of monthly base fee payments and at $32 $3 million increase in.
In accrued incentive compensation, resulting from a change in estimate aggregate payments probable of being made as a venture makes future distributions.
We owned 37.5%.
Interest.
We own 37, 5% as a percent interest.
Park venture and 100% of the management company, although the Great Park segment reports the full results of the great part venture our investment is reported 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 company's equity and loss from the Great Park venture after adjusting for basis difference 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 corridor.
Our commercial segment broke even for the quarter.
Which included $100000 loss from operations.
Gateway commercial venture and $100000 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.
175% of the gateway commercial venture and 100% of the management company our investment in the venture as reported under the equity method of accounting and therefore, the assets liabilities cash flows and results of operations of the venture are not consolidated within our financial statements.
Five points equity and loss for the quarter from the gateway commercial venture with 87000.
With that I'll turn it over to the operator for questions.
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Well pause for just a moment.
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Yes.
My first question.
Thank you.
Okay.
Please go ahead.
Hi, guys. Thanks for taking my questions I had a couple.
On the 625 million.
Got it.
Just based on where the fair value of it was.
Last quarter in your lease.
It seems like the debt markets are relatively closed already really high interest rate. If you ever had to refinance that in this market can you just talk about your plan.
What you guys see happening to that 25 million in debt.
Dominic Thank you for that question.
The maturity is in 'twenty five.
And we obviously have done a lot of thought about how our cash flow looks between now and 'twenty five and the opportunity to retire that debt.
We've looked at opportunities to refinance the debt and you're right. It's today.
Capital markets are a little bit dicey, and so I think you know where I would like to give you a direct answer I think it's always going to be kind of market dependent but as we said you know from a balance sheet perspective, we are always looking for opportunities to generate cash and you know we may elect at some point.
Some of that cash to pay down the debt, but I think we're really going to do have to do as you see how the market progresses over the next three years and really take it from there.
Got it okay.
Next just on the Great Park venture is you guys talked about it being self funding no dot $129 million in cash and you've got able to be distributed to five point or how I guess, what's the point of that cash being.
At Dallas at Great Park ventures.
So that make the you know obviously, it's a partnership as you know and we actually do do distributions from time to time and you know.
As part of that is a discipline that we work with all the partners to make sure that we have plenty of cash so at Dallas Self fund and there is no additional needs, but we what we do is quarterly we do look at those balances we look at future needs, we look at upcoming closings than we do.
Do make distributions so when you see that balance that's a conservative balance.
But as it as cash grows we will make distributions, but it really is just to make sure that we're well positioned there and have no cash needs.
Okay.
Is there a dollar amount that if it were do you surpassed there would be I don't know if I can automatic distribution.
Or is it just a case by case basis.
Yes, there is no kind of.
Mathematical it really is a case by case basis, all of the partners discuss the available cash and agree on the distribution, but it is looked at on a regular basis, because you're correct. There's not a lot of reason to leave it there if you don't need it.
Right. Okay, and then just last question for me I believe you guys had a $56 $3 million I think it was that related party like principal payment.
That was in your annual report is that going to be paid this year I know there was a way you could defer it just any update on that.
Okay.
Dominic one more time, what was the payment you're asking about and I'm sure I'm not sure I followed it I thought there was a $56 3 million dollar principle.
And from a related party principal payment on debt.
We're making sure.
Yes, that's not all do in the current year that phased out over multiple years.
As the reimbursement needs to be funded.
It's not currently do okay.
Okay Alright.
Alright awesome. Thank you very much.
I would like to ask a question.
We'll take our next question.
Please go ahead.
Hey, guys. Good afternoon, thanks for taking the question.
Dan you kind of walk through the sales activity in your communities and I think we've heard from a lot of builders about what's going on there I'm. Just curious if you can talk a little bit about what's going on in the pricing side. The home price side, you know we've heard over the course of earnings calls this week incentives across the industry have increased pretty significantly in.
I'm just curious as you as you track not only the sales activity, but also the discounting and the incentives what type of price adjustments. If any you guys have seen in your communities.
Hi, Alan How're you doing.
Good.
Dan actually sorry, I missed your team earlier this month when I wasn't available when you're out here, but you know.
Every builder is kind of have their own model for what theyre doing and from our standpoint, as a master developer and the way our land sales work once they close on the land. We we obviously know their pricing we know whatever incentives they're using.
But we don't get to control it.
But what we're seeing now and then I'm sure you're aware of it really kind of seen different approaches. Some builders are looking just at price.
Some builders are looking at interest rate buy downs.
And I, you know and Theres there really is no one answer and there is no one amount what what we're finding is which probably won't surprise you is that it.
It really varies a lot by product.
There is some product that there is as needs less work to sell in some that needs a little more push so there I can't tell you. There's one answer to that but you're certainly right from your conversations with other builders. They all have become proactive in the market.
To continue absorption through.
So, but it's just it's it really varies a lot and I have my I have looked at Allen and there really is there was one answer I give it to you it everyone's got a different program.
Got it okay I appreciate that Dan.
And I guess second question and this is just more thinking out loud here. So you know Valencia is still pretty early on in its lifecycle, you've got a lot of a lot of run way out ahead of you there and I certainly understand not wanting to pay or any of the values there by selling land that at a price that you don't think.
It's you think if it's too low but on the flip side to it.
Just putting on like pretending I was at the homebuilder here.
You guys are in a unique position because your land cost basis.
In the near term you probably less focused on margin for example, and more focused on on cash flow and cash generation. So why not kind of lean into that why not take a phase maybe in Valencia and offer a discounted lot price to try to get the builders comfortable with.
Them being able to offer a product that's affordable in today's market and maybe ultra competitive it would seem like it would be a win win you would get the builders active and being able to build product at an affordable price point and also get some some cash flow and your door during a difficult operating.
Operating environment.
Well.
Yeah.
You know that's a very that's very interesting thought that.
And.
Having done this a long time and sold land through good times and bad times.
You're absolutely right, we're going to need to be somewhat creative at times and proactive but.
With what.
What the open communities, we have the day and with the communities that are that land had been sold what I'm always trying to be sure. We're doing is.
Supporting the builders that are in place today.
And so I would not want to discount land to under price, what's coming but I think that there are some things we can do in the future on this scope and scale of <unk>.
This kind of market correction.
There's a lot of things around structure that I think we can do that allows us to continue to move to land into work with the builders, but I'm, but I always start with how do I be sure that the builders that are in place and have land are successful.
Yes, no that makes that makes a lot of sense and I can understand that I am just thinking maybe if a project is large as Valencia is perhaps there is a way to you.
Offer a different product different density.
It was affordable and maybe not competitive to the land that builders are currently building on and also finding a way to generate some some activity during a softer period for the next year or two so it'll be interesting to see how do you guys handle that.
Right. What you just said would be key if you're truly could find a noncompetitive different segment than you could work in that concept, but that that really would be the key.
With your stock obviously is trading below book value. So the markets not giving you credit for the value of the long term value of the land here I think it's telling you that they're concerned about that.
More of the shorter term cash flow generation, so selling even land at potentially a book value discount I don't think is necessarily going to be viewed negatively by the investment community.
Okay.
And you know by the way there are some other there are some other thoughts out there that we're actually looking at it because even.
Homes for rent.
And that segment out there, but there are a couple of folks we're talking to about that too so that would be a totally different segment. It could give us an opportunity to generate cash flow with not without hurting our current builders and maybe generating.
Generally in some future homebuyers. So there are there are a couple of ideas out there that we are definitely looking at.
Great well, thanks for talking through with me and good luck and hope you guys all have a great holiday season.
Thanks Alan.
Okay.
Once again, if you would like to ask a question.
It appears there are no further questions at this time I'd like to turn the conference back to Dan.
Thank you.
On behalf of our management team. We thank you for joining us today on today's call and we look forward to speaking with you next quarter and there's Alan just reminded me I can't believe it's almost November so happy holidays to everyone and we'll look forward to seeing you in January so long.
This concludes today's call. Thank you for your participation you may now disconnect.
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