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Edited Transcript of FPH.N earnings conference call or presentation 14-May-18 9:00pm GMT

Q1 2018 Five Point Holdings LLC Earnings Call

ALISO VIEJO May 16, 2018 (Thomson StreetEvents) -- Edited Transcript of Five Point Holdings LLC earnings conference call or presentation Monday, May 14, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Emile K. Haddad

Five Point Holdings, LLC - Chairman, President & CEO

* Erik R. Higgins

Five Point Holdings, LLC - CFO & VP

* Robert C. Wetenhall

Five Point Holdings, LLC - EVP, Capital Markets

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Conference Call Participants

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* Christopher John Shook

Evercore ISI, Research Division - Analyst

* Kenneth Ling

* Michael Benjamin Eisen

RBC Capital Markets, LLC, Research Division - Senior Associate

* Neal Anjan BasuMullick

JP Morgan Chase & Co, Research Division - Analyst

* Nishu Sood

Deutsche Bank AG, Research Division - Director

* Paul Allen Przybylski

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Thomas Patrick Maguire

Zelman & Associates LLC - Senior Associate

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the Five Point Holdings, LLC First Quarter 2018 Earnings Call. (Operator Instructions) The conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Bob Wetenhall, Executive Vice President of Capital Markets. Please go ahead, Bob.

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Robert C. Wetenhall, Five Point Holdings, LLC - EVP, Capital Markets [2]

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Thank you. Good afternoon. Today's conference call may include forward-looking statements regarding Five Point's business, financial conditions, operations, cash flows, strategies and prospects. Forward-looking statements represent only Five Point's estimate on the date of 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 factors could affect future results and may cause Five Point's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described in today's press release and Five Point's SEC filings, including those in the Risk Factors section of the 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.

Thank you for joining us on our first quarter conference call. I'm here this afternoon with CEO, Emile Haddad; CFO, Erik Higgins; Chief Legal Officer, Michael Alvarado; Chief Policy Officer, Greg McWilliams; and our co-COOs Kofi Bonner and Lynn Jochim.

I'm going to hand it off to Emile who will provide a brief recap of first quarter results as well as his current outlook. Erik will then provide additional detail regarding our recent financial performance and liquidity.

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [3]

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Thanks, Bob. Let me start by saying that the operational momentum that we had at the end of last year carried over into the first quarter of 2018. California's economy remains healthy. The combination of land constraints that have limited residential complexion activity. And vibrant job growth in San Francisco, Los Angeles and Orange County have created strong tailwinds that can support home price appreciation and an increase in the value of our land portfolio. We expect that these trends will persist during the balance of the year.

Starting with Newhall Ranch in Valencia, our development activities have continued since our last conference call. Accordingly, we remain on track to start delivering homesites to builders in Mission Village towards the end of 2019. We think that the combination of robust job growth and the limited availability of homesites in Los Angeles County will result in strong demand at Mission Village, which is approved for up to 4,055 homesites in approximately 1.6 million square feet of commercial development.

Switching to San Francisco, as noted on our last call, we have moved our focus to Candlestick where we are continuing to move forward with infrastructure development. We are also working on the redesign and the proper mix of uses at Candlestick point in light of the rapidly changing retail environment. We also received milestone approvals from 3 important governmental bodies as it pertains to our efforts to secure an additional 2 million square feet of commercial entitlements spread across our communities in San Francisco, and we anticipate receiving final approvals before the end of the year.

I also want to provide an update regarding recent events in the Shipyard. Over the past few weeks, there has been renewed attention to expedite finalizing the work planned for any retesting at the site. As recently as this morning, the House Democratic Leader and former Speaker Congresswoman Nancy Pelosi, sent a letter to the Secretaries of both the Navy and EPA to bring increased urgency to retesting on the site. Additionally, she noted that she had recently secured additional funding in the amount of $36 million that is earmarked for retesting efforts at the Shipyard. With respect to timing as recently as last week, the Navy shared a schedule with the community showing a time line for the future conveyance of land parcels that is consistent with prior schedules. We will continue to monitor these schedules as the Navy and the city provide updates to us.

As we speak today, the Board of Supervisors in San Francisco is holding a hearing on these matters, which should provide more clarity with respect to the timing and the process.

In the Great Park Neighborhoods, consistent demand and a limited supply of housing in Irvine has supported a brisk pace of sales since the start of the year. Parasol Park is substantially sold out, and sales at Cadence Park, our newest neighborhood, which opened its first phase in March are off to a good start. We're excited about Cadence Park for many reasons. Cadence features 7 builders offering 4 key products on slightly more than 1,000 homesites. It is important to highlight that we have intentionally sold to create diverse product offering that can meet the needs of a wide range of buyers. For example, the square footage of new homes ranges from a low of 1,650 square feet which is priced in the mid-600s to a high of more than 4,500 square feet which is priced at almost $2 million.

I also want to bring you up to the date on recent developments at Great Park Venture that transpired after the end of the quarter. In April, the Great Park Venture made a distribution of $235 million to legacy investors that have a priority claim on cash flow. And in May, the Great Park Venture sold 33 acres for a $166 million. This translates into a price of approximately $5 million per acre and validates our view of the residual value of our assets.

With that, I'd like to turn it over to Erik to discuss our financial performance.

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Erik R. Higgins, Five Point Holdings, LLC - CFO & VP [4]

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Thanks, Emile. A summary of our financial results was included in the earnings release issued earlier this afternoon. As we've discussed on previous calls, our consolidated financial results for the next few quarters will reflect our continued investment in planning and development at Newhall Ranch and Candlestick Point. As a reminder, our Newhall and San Francisco communities are wholly owned and thus consolidated on our financial statements, while the Great Park Venture and the Gateway Commercial Venture are unconsolidated entities that are accounted for using the equity method of accounting.

Revenues for the first quarter of 2018 totaled $15 million and were primarily generated from management fees and agricultural operations. Revenue this quarter reflects the absence of residential land sales during the quarter. Other income of $12.5 million reflects a $6.7 million gain on the sale of the TPC Golf Course in Valencia. Net cash proceeds from the sale were $5.7 million. Additionally, the buyer assumes certain liabilities associated with the golf course.

The additional components of other income are interest income of $2.7 million and a $1.9 million in income due to the change in estimate, which decreased the liability associated with our tax receivable agreement.

For our unconsolidated investments, which include our 37.5% interest in Great Park Venture and our 75% interest in the Gateway Commercial Venture, we recognized a loss of $3.6 million. Great Park Venture's net loss for the quarter was $14.7 million due primarily to the absence of land sales.

Our 37.5% proportionate share of this loss after adjusting for the basis difference was $4.1 million.

Gateway Commercial Venture's net income was $600,000 for the quarter and our 75% proportionate share of this income was $450,000. Corporate and divisional SG&A was $29 million for the quarter, and a net loss for the quarter was $14.3 million. It's also worth pointing out on January 1, 2019 -- 2018, we adopted a new revenue recognition standard, ASC 606, revenue from contracts with customers. The immediate impact of implementing this new revenue standard was an increase to capital of approximately $25 million. The primary components of this adjustment were recognition of deferred revenues and marketing fees from prior period land sales and the recognition of incentive compensation we expect to be entitled to under our development management agreement with Great Park Venture. Going forward, the impact of applying the new revenue standard will be to more closely match the recognition of revenue under our purchase and sale agreements, our development management agreements and other revenue-generating contracts with the transfer and control of different services regardless of when the cash is actually received.

Now let me address some of the changes in our balance sheet during the quarter. Inventory increased by $46 million. The net increase is the result of $55 million in addition to inventory offset by inventory relief of $9.5 million in connection with the recognition of deferred revenue related to the implementation of the new revenue recognition standard I just discussed.

Related party assets rose by $42 million, reflecting an increase in contract assets or receivables related to the adoption of the new revenue standard and recognition of revenue before the receipt of the cash.

Our cash balance at the end of the quarter were $778 million, which was a decrease of $70 million. We had no outstanding borrowings under our $125 million corporate revolver, resulting in total liquidity of approximately $900 million. Total booked capital at the end of the quarter was $1.9 billion, and our debt-to-total capital ratio remained unchanged at 24%.

Let me turn it back to the operator now who will open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Michael Rehaut of JPMorgan.

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Neal Anjan BasuMullick, JP Morgan Chase & Co, Research Division - Analyst [2]

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This is Neal BasuMullick in for Mike. I guess, I just want to start out on Great Park. Maybe, can you talk a little bit more about the demand that you're seeing in, maybe, how the newest neighborhoods trending relative to your expectations?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [3]

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Well, as I said, the demand is very strong. We're seeing a very consistent sales program going on since we opened Cadence. Parasol has sold out. And we're seeing a very consistent sales pace to the one that we're seeing for last 2 or 3 years actually.

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Neal Anjan BasuMullick, JP Morgan Chase & Co, Research Division - Analyst [4]

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Okay. That's helpful. And then maybe if you could touch on the solar mandate in California? What you're seeing there? And maybe any impact on affordability?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [5]

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The brand new and I think there is a lot of debate as to how much it's going to impact affordability. I think you have a lot of people who are looking at the absolute dollars needed, but there is also, I've seen a lot of analysis on the amount of monthly cost versus monthly savings. So I can't comment on the net-net cost just because I haven't seen all of that analysis done. What's more important is for Newhall Ranch, for instance, which is our biggest project, we have made a commitment before this came into play to be net 0 greenhouse gas emission. And therefore, a 100% of our homes are going to be solar. At the Great Park Neighborhood, every home that we designed is designed for solar panels. Some members are using that like Lennar uses solar in all their homes. Other builders have different decisions. But in terms of the cost, obviously, I think it's still brand new. This is 48 hours. So I don't want to comment on dollars until I see full analysis.

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Operator [6]

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The next question comes from Thomas Maguire of Zelman & Associates.

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Thomas Patrick Maguire, Zelman & Associates LLC - Senior Associate [7]

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Quickly just wanted to touch on the management services side of the business. With the recent transaction over Treasure Island, it look like you guys weren't involved there and had been a manager on the project, you still are understanding, it's a small piece of the strategy. Does kind of that ownership change, in fact, the go forward interest or management fee there at all? Or anything we should keep in mind with that change?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [8]

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Yes. First of all, I mean, it's really, use the word, strategy, our management arrangement at Treasure Island is not a company strategy, it was done out of a necessity of transition between Lennar's management team and the Five Point's management team. So we are providing that as a service because of that transition. As delays to the fees, yes, over time, I mean, if we -- once we phase out, we will not be receiving the fees that we are receiving today on Treasure Island, but as a result of our anticipation of that, we have been looking where the Kofi and his team up there to make sure that the offset on G&A that was expected to actually be associated with that fee, will be -- will create a loss in terms of the company's impact.

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Thomas Patrick Maguire, Zelman & Associates LLC - Senior Associate [9]

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Got it. That's really helpful. And then just on the development side of the business, I don't know if we have a firm number out there, but just any thoughts on what you're targeting for 2018 land spend and development spend in total or alternatively, just any qualitative thoughts as to whether that's changed or kind of trended directionally relative to your expectations during the year?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [10]

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No. We don't have a number like that. And typically, we don't disclose it, but nothing has changed. We have already stated that in the last 2 or 3 quarters that the land development process in Newhall fortunately ended up happening a year earlier than we thought. So we're spending a lot of money in Newhall in land development. In terms of San Francisco, the shift to Candlestick actually gives us the opportunity to have less than we expected originally in terms of land development spend. And as you know, the Great Park Neighborhoods is a stand-alone entity that has its own funding.

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Operator [11]

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The next question comes from Nishu Sood of Deutsche Bank.

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Nishu Sood, Deutsche Bank AG, Research Division - Director [12]

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First question on Newhall. The late 2019 release at Mission Park, what's the latest on what you're expecting in terms of the number of lots to be released there? And how that might -- what numbers you might get in terms of lots that move in '19 and in '20?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [13]

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Sure. Well, Nishu, this is Emile. We -- right now, I think that we are working towards at least 500 deliveries at the end of '19, but hopefully when you combine end of '19 with the first quarter of '20, which from a land development point of view, you really can't pin it down sometimes during month. We are hoping that, that number will be close to 3,000. So I would say that the goal, right now, in which we're working towards, is a delivery of about 1,000 homesites sometimes within the period of the end of '19 through the first 2 quarters of 2020.

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Nishu Sood, Deutsche Bank AG, Research Division - Director [14]

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Got it. Okay. And the Hunter's Point detail, I appreciate the color there. Just in terms of the landscape on the soil testing, et cetera, there are some additional questions that are being put out there about the existing areas of development. Do your comments encompass that? Or is that something additional to be resolved in terms of getting back on track in terms of delivery of the land and construction schedules?

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Erik R. Higgins, Five Point Holdings, LLC - CFO & VP [15]

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Yes. The only part of my comments that involve that is my reference to the letter to both Secretaries, the EPA and the Navy, from the former speaker of the house, where she requests from both of them a scanning of what is referred to as Parcel A, which I think is the parcel that you're referring too. The -- that parcel was used for housing and was never used for industrial purposes, and the letter, which I'm sure is a public letter, stated that, notwithstanding because of -- a lot of concerns of people over there, there is a request of scanning of that area as part of the whole process.

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Nishu Sood, Deutsche Bank AG, Research Division - Director [16]

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Got it. Got it. Okay, helpful. And just final one, a quick follow-up on the solar question. You bring up a good point that costs are still to be determined. There is offsets in terms of electricity savings. And it's pretty small increment against what you sold those units for -- generally, across-the-board. What about on the affordable side of things? Is there any potential offset there on the affordable deliveries?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [17]

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If you're talking about the affordable, meaning the affordable housing that we're required to provide in certain of our communities, is that your question?

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Nishu Sood, Deutsche Bank AG, Research Division - Director [18]

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Yes.

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [19]

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Yes. Well, those homes are typically subsidized anyway. And when you look at the -- where our market rate pricing is versus where these homes end up being priced for as part of our requirement, the additional panels were really not being a big incremental increase in the subsidy.

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Operator [20]

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The next question comes from Stephen East with Wells Fargo.

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Paul Allen Przybylski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [21]

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This is actually Paul Przybylski on for Stephen. Following on Nishu's question about Hunter's Point. If they were to retest the hilltop portion, would you have any sort of liability if the soil was found to be contaminated? And also along these lines, how sales been progressing there given all this publicity?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [22]

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Sure. First of all, in terms of the blanket answer of liability, under the BRAC, which is the Base Realignment and Closure legislation, the liability of any of the cleanup stays with the Navy, and the Navy's indemnity stands behind that. So when you ask about liability, the answer is no. There is no liability to us or to the builders, it stays with the Navy. Parcel A though is not a parcel that we already developed, it was actually a parcel that was retained by Lennar, and they are the ones who are building and selling homes. So the question as to these sales and all that is much more appropriate to be asked of them. But the answer to the question of liability is that we do not have any exposure to liability over there. The only exposure we have potentially is a delay of timing of delivery of parcels, and that's why we shifted to Candlestick point when this started being discussed. Although, as I said, as of last week, the Navy's scheduled print shows consistency of delivery with previous schedules.

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Paul Allen Przybylski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [23]

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Okay. And as you work through the mall planning with Macerich depending on the ultimate outcome of that, what kind of impact would that have on your loan with Macerich?

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Erik R. Higgins, Five Point Holdings, LLC - CFO & VP [24]

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Well, I mean, the impact would be -- if a decision was made by Macerich and by us to unwind the deal, then it's a stated liability on our balance sheet, and we will just give them back the amount of cash which is about $65 million-or-so and basically gets back the 50% interest in the land that they own, assuming that that's the conclusion. Obviously, we are not there yet, but that would be the exposure.

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Paul Allen Przybylski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [25]

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Okay. And then just one last one on the Great Park sale. And they -- what -- are those going to be single family attached or detached? And what price point should we be looking for there?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [26]

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Well, our product that we're doing right now at the Great Park is a mixture of actually attached and detached, including what we refer to as single as detached condominiums, which is a high risk. And as I stated what we do over here is, every time, we come out with a neighborhood, we try to create a diversity of pricing and product offering to keep it to a very broad base. So we would expect that to be -- that neighborhood to be more on the lower side because it's a higher density product than Cadence, for instance, when you look at it on a blended basis.

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Operator [27]

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The next question comes from Stephen Kim who's with Evercore ISI.

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Christopher John Shook, Evercore ISI, Research Division - Analyst [28]

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This is actually Chris Shook on for Steve. Just wondering from a high-level perspective, do you have any interest in pursuing any land banking activities outside of your existing portfolio at this juncture?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [29]

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Look, we will have an interest in pursuing anything strategically that fits within the company's capability and strategy. And land banking could be one that we will be looking at in the future, subject, obviously, to liquidity. But it is one of those strategies that we have been talking about and potentially could be pursuing.

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Christopher John Shook, Evercore ISI, Research Division - Analyst [30]

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And would you like to do sort of any strategies outside of California?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [31]

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No. Our -- the company is going to be only a California-focused company, and mainly in the primary market in California, focusing on value creation in areas that we can bring our own expertise to. As I said in the past, if there is a opportunity that are not going to be organic growth, those will be repurposing of space, which is an area that we feel we have a lot of strength.

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Operator [32]

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The next question comes from Will Randow who's with Citi.

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Kenneth Ling, [33]

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This is Ken Ling on for Will. Sir, come back to Great Park where you sold 33 acres this quarter, a little bit lumpy, but is there anything you can share in terms of pacing at the land sales in Great Park for the rest of 2018?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [34]

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Sure. We actually end up delivering to the market the homesites that are consistent with the amount of absorption at homes. We try to dovetail our new neighborhoods with the build-out of neighborhoods that are already in progress. So at the pace that we're seeing today, there is a possibility of another 500 homesites that we would probably bring to the market towards the end of the year assuming that the market stays performing at the same absorption rate that we're seeing today.

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Kenneth Ling, [35]

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Great. And it sounds like pretty good progress at Candlestick for the commercial square footage. Specifically, what is needed for the final, approval for that?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [36]

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So I mean, the process goes through different bodies of government for approval, like a Planning Commission. The final approval will be the Board of Supervisors' approval. And the free approvals we've brought gotten mainly from Transportation as well as from the Planning Commission have been unanimous approvals and that gives us a lot of comfort that -- it means that there is a lot of support for the process within the city of San Francisco, and we expect the Board of Supervisors to approve that and give us their final blessing by -- before the end of the year.

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Operator [37]

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The next question comes from Michael Eisen who's with RBC Capital Markets.

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Michael Benjamin Eisen, RBC Capital Markets, LLC, Research Division - Senior Associate [38]

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Just following up on some of the questions of the land sale you guys had since the end of the quarter. When you look at that kind of $5 million per acre spend at an average, is that kind of the average of what you're seeing for the land there? Is this kind of a more premium or a more discounting parcels land? And how should we think of this compared to kind of your prior estimates when we're originally talking a year ago at this point?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [39]

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Well, as I said, I mean, these values are consistent with the escalation of pricing that we were looking at a year ago. The last -- I think when we were talking a year or so ago, we were talking about something in the $4 million an acre in the Cadence, which was our last sale, that was at $4,650,000 an acre, and this later sale is at $5 million an acre. So the point is that we are seeing an escalation of price per acre that is very much consistent with our view of the appreciating land portfolio that we own.

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Michael Benjamin Eisen, RBC Capital Markets, LLC, Research Division - Senior Associate [40]

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Got it. That's really helpful. And then when thinking about what some of the commentary coming out of builders and what we're seeing in the market for input cost inflation of raw materials and labor, can you talk to kind of what you're seeing and the conversations that you're having with your builders in the current environment? And what that means for your guys profit sharing on the development on some of the communities that are active at this point?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [41]

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Sure. We're hearing from the builders the same thing you're hearing that they are starting to feel a lot of pressure on the cost side. Honestly, I think we were hearing more about that about a year ago. And we're hearing -- we've been hearing lately and at least in the late sales that we had as we were in discussions, it was less of an issue than probably about 1.5 years ago or so. In terms of profit sharing, we shared with the builders on a pretax basis. So obviously, if after the sale is done, there is continued escalation in cost that will have an impact on the profit sharing, assuming that the home price appreciation is not increasing at the rate that's higher than the cost escalation. So I can't comment on it because you have to look at the 2 variables together.

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Michael Benjamin Eisen, RBC Capital Markets, LLC, Research Division - Senior Associate [42]

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Sure. And that's very encouraging by the cost side. And then one last question, if I could sneak it in. There's been a lot of investor concern recently about higher interest rates and what that means to affordability in the view for demand and housing in the cycle? Can you kind of remind us what percentage of the buyers in your markets are typically cash buyers? And whether you've seen any sort of slowdown in the communities that are already selling? And kind of how this is actually playing out in the ground compared to what investors are concerned with?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [43]

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Sure. So in Newhall, obviously, we don't know yet because we haven't started home sales, but we have a very good view on a significant amount of home sales that had happened at the Great Park. And 40% at the Great Park of our buyers or the buyers over there had been cash buyers. And of the other 60%, 40% of them have -- I'm sorry, for the other percentage, 60% of them have been putting more than 40% down payments.

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Operator [44]

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There are no more questions at this time. This concludes the question-and-answer session. I would like to turn the conference back over to Emile Haddad, for any closing remarks.

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [45]

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Well, thank you very much. Appreciate everybody's listening. And as you can see, we are moving forward very consistently with previous guidance. And with now all 3 assets being operational, we are very excited about the balance of '18 and really looking forward to a milestone of the year for 2019 for the company. Thank you very much.

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Operator [46]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day.