Five Point Holdings, LLC (NYSE:FPH) Q2 2023 Earnings Call Transcript
Five Point Holdings, LLC (NYSE:FPH) Q2 2023 Earnings Call Transcript July 20, 2023
Operator: Greetings, and welcome to the Five Point Holdings, LLC Second Quarter 2023 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 as to actual of 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 Five Point's most annual -- I'm sorry, most recent annual report on Form 10-K filed with the SEC. Please note that the Five Point assumes no obligation to update any forward-looking statements. Now, I would like to turn the call over to Dan Hedigan, Chief Executive Officer.
Dan Hedigan: 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 second quarter of 2023. I will also update you on our team's focus during the quarter and the steps we are taking to implement our strategic priorities in 2023. Next, Leo will give an overview of the company's financial performance and conditions. We'll then open the line for questions to our management team. Let me begin by telling you we have made considerable progress since I last spoke to you in advancing our business, and to that end, we have continued focusing on controlling our business and executing on our three main priorities: generating revenue and other positive cash events; manage and rightsizing our SG&A; and managing and limiting our capital spend and matching those expenditures as much as possible to revenue events.
As a result, we ended the quarter with consolidated net income of $50.6 million as compared to a net loss of $9.7 million for the first quarter. Our balance sheet reflects $193.2 million of cash on hand versus $106.6 million at the end of the first quarter, with $0 drawn on our $125 million revolver, giving us liquidity of $318.2 million today versus $231.6 million last quarter, and improving our debt to cap ratio to 24.7% versus 25.2% last quarter. We also have no principal debt repayment obligations on our senior notes this year or next. These results reflect the team's efforts and focus on our priorities. At the beginning of the year, we provided guidance that for the first half of the year, we expect a negative cash flow of $24 million to $56 million.
In fact, for the first half of the year, we generated positive cash flow of $61.4 million, fortifying our balance sheet and positioning Five Point for future success. Along with significant improvement in revenue and cash flow, we've been able to hold our SG&A in check, with SG&A of $12.7 million this quarter versus $13.8 million last quarter and $26.5 million for the first six months of 2023 versus $29.4 million for the first six months of 2022. With respect to managing our capital spend, for the first six months, we spent $46.8 million before recoveries and capitalized interest as compared to our guidance at the beginning of the year of $45 million to $55 million and compared to $63.1 million for the first six months of 2022. We are clearly controlling our business.
In many ways, our strong financial results are due to a combination of focused management as well as a constructive economic environment. From an economic perspective, the challenges from interest rate increases and the banking crisis from earlier in the year began to dissipate during the second quarter. And the housing market began to stabilize as homebuyers adjusted to and accepted higher interest rates. Interest rate fluctuations have moderated and we're seeing more measured rate movements that allow the market to adjust in an orderly fashion. Of particular note, we see our home inventory remains very low, increasing interest in and demand for new homes. While affordability continues to be a challenge, housing continues to be in short supply in our California markets and there is still demand for well-located homes and master plan communities.
On the commercial land side of our business, we're seeing strong interest in our unique commercial land offerings at the Great Park and Valencia. We continue to have low vacancy rates in industrial market in our communities. We expect we'll continue to drive demand in this preferred asset class, not notwithstanding the adjustments that capital markets have made in the commercial market segment. I'll now provide some updates on each of our communities. The open builder neighborhoods at the Great Park continue to sell homes with strong increase in sales in the first half this year compared to second half of 2022. During the second quarter, builder in our Great Park community sold 177 homes. Solis Park, which is a primary community with multiple active offerings, had its first model complex open in July 2022 and currently has only 200 homes remaining to sell out of the original 849 homes.
As we discussed last quarter, we're seeing strong homebuilder interest in acquiring home sites at Great Park. On our prior call, I mentioned that we were actively engaged in the process selling the remaining 81 home sites in Rise community and 770 home sites in our next community District 5 South. That transaction closed in May of this year, and the Great Park Venture recognized $357.8 million of revenue. Also in the second quarter, the Great Park Venture received $61 million of CFD proceeds as reimbursement for public improvements at venture had completed or paid for. With this pace of new home sales, we are continuing to see strong builder interest in acquiring new home sites at Great Park. During the quarter, we entered escrow for the sale of another 82 homes program, which anticipate closing by year-end.
We're also negotiating to sell another 104 home sites, with the close anticipated in early 2024. On top of the ongoing residential opportunities at Great Park, we continue to market and sell our commercial land, including the industrial land offerings that we brought to market in August last year as well as other commercial-oriented uses. While not the most optimal time to enter the market, our location in the heart of Orange County support a strong interest. Our commercial parcels are unique, our limited resource and offered to the South Orange County market something that has not been available for years, large parcels of entitled land with flexible zoning that allows multitude of uses, including industrial, distribution, life sciences, R&D and office amongst others.
To that end, we anticipate closing sales on approximately 40 acres either by the end of this year or early next share. After these residential and commercial sales, the Great Park Venture will have about 295 acres remaining. Depending on pace of sales, we would expect to be through remaining inventory at Great Park in five to eight years. In Valencia, new home sales by builders totaled 79 homes during the second quarter. As of mid-July, 1,100 homes from our initial offering of 1,268 homes have been sold with only 168 homes remaining. Builders have now opened the models in two of the eight new neighborhoods in the next area of Valencia, which encompasses 598 homes. Like Irvine, builders are again engaged with us in Valencia, and we entered into one new land sale contract during the quarter, anticipate finalizing another, both of which we anticipate will close during the third quarter.
We also anticipate signing a third land sale contract that we believe will close by year-end. We also continue to market a prime 35-acre commercial site in the community. We expect to have more to report on that later in the year. While we didn't have land sales in Valencia in the first half of the year, and instead of planning for sales to close in the second half of the year, we're still able to execute on some significant reimbursements and recoveries. If you recall that we reported a $17.7 million CFD reimbursement in the first quarter. Additionally, in the second quarter, we collected a $44.5 million recovery from a third-party arising out of prior work [indiscernible] performed its project. From accounting perspective, these amounts that have been offset against our inventory costs will ultimately increase our gross margin of Valencia sales.
As you've heard me state in the past, San Francisco remains a priority for Five Point, and we are progressing our efforts to establish Candlestick as a standalone project, separate from, but complementary to the ultimate development at the Hunters Point shipyard site when it has completed its remediation by the Navy. These efforts include working with the city and county agencies to rebalance the current development entitlements between the two areas. I concurrently working with the city to update the existing tax increment financing timelines to account for the Navy delays at Hunters Point. Believe that we are building momentum on resolving these issues, which will allow us to unlock the standalone development of Candlestick, as the first phase is this larger mixed-use community, located on irreplaceable land along the San Francisco Bay.
As we look ahead, we're starting to build confidence and certainty in our expectations for future accomplishments. Although our business is often dependent on government approvals and accomplishments can be pushed from one quarter to another, we are building visibility in the future quarters and years. To that end, we expect in the second half of 2023 to be able to produce an additional $50 million to $70 million of net income and generate additional cash flow as well, ending the year with a cash balance of $250 million to $300 million. While some of these results can be pushed quarter-to-quarter or to next year, we're focused on generating revenue, managing SG&A and managing our capital spend. We have positive momentum and remain optimistic about our future.
Land development is a long game, and we are just at the beginning of the game at some of our communities, but they are not making any more land and there will never be an abundance of entitled land in California. Our efforts today are ensuring we are well positioned for that long game while recognizing the importance of focus on creating and maintaining shareholder value. Now, let me turn it over to Leo, who will report on the financial results.
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Leo Kij: Thanks, Dan. A summary of our financial results was included in the earnings release issued earlier today in which we reported consolidated net income of $50.6 million for the quarter. We recognized $21.3 million in revenue that was primarily generated by management services provided by our management company. Selling, general and administrative expenses were $12.7 million, which is consistent with the average of $12.9 million that we have reported over the past four quarters. Cost of management services was $9.7 million, which includes $8 million for intangible asset amortization expense at our Great Park segment. Equity and earnings from our unconsolidated entities for the quarter was $52.1 million and primarily results -- represents our interest in net income generated at the Great Park Venture.
Turning to the balance sheet and liquidity. Our net decrease in inventory for the quarter was $5.7 million, this includes a decrease for a non-recurring $44.5 million recovery from a third-party related to certain project development costs at our Valencia segment, and includes an increase for accrued capitalized interest on our senior notes of $12.3 million. Excluding the recovery and capitalized interest, the resulting increase in inventory of $26.5 million was consistent with prior quarter and 13% lower than the prior year increase of $30.6 million. In addition to $700,000 of interest, we paid $2.5 million against our San Francisco segment's related party reimbursement obligation during the quarter. Approximately $8.4 million of this reimbursement obligation that was previously expected to be paid in the second quarter has been deferred to 2024.
Our related party has a history of receiving maturity date extensions, and we expect additional deferrals during the second half of 2023. Total liquidity was $318.2 million at quarter-end and is comprised of $193.2 million of cash and cash equivalents, and $125 million of available borrowing capacity under our revolving credit facility. No borrowings or letters of credit were outstanding against the revolver as of June 30. In addition, no principal payments are currently due on our senior notes nor are any payments currently due on our payable pursuant to our tax receivable agreement. Our debt to total capitalization ratio was stable at 24.7%, and our net debt to capitalization ratio after taking into account our cash balance was 18.5%. Turning to our statement of operations.
The company has four reporting segments: Valencia, San Francisco, Great Park and Commercial. Segment results are as follows: The Valencia segment recognized a $4.5 million loss for the quarter. As no sale were closed, most of this loss was comprised of selling, general and administrative expenses of $3.4 million related to employee compensation as well as selling and marketing expenses in support of our active development areas and the pursuit of 2023 land sales. The San Francisco segment recognized a loss of $885,000 for the quarter. This loss is comprised of general and administrative costs incurred to support the segment's continued focus on rebalancing the current entitlement between Candlestick and Hunters Point shipyard sites, as well as working with the city to update the existing tax increment financing timelines.
Our Great Park segment reported net income of $179.1 million for the quarter. This was comprised of net income of $168.2 million for the venture's operations and $10.9 million in net income generated by our management company. The venture's operations recognized revenue of $360.6 million during the quarter. Most of this revenue is comprised of $357.8 million recognized from the sale of 798 home sites on approximately 84 acres of land adjacent to the venture's Solis and Rise neighborhoods. The venture's land sale agreement was comprised of a fixed amount paid at closing and a price participation rate to be paid from future homebuilder sales. Accordingly, the revenue recognized consists of $214.7 million paid at closing, plus $143 million for recognition of a contract asset representing the venture's estimate of variable consideration from future price participation payments.
The venture recognizes contract revenue upon satisfaction of contract performance obligations and records contract assets when there is a timing difference between recognition of revenue and the variable consideration becoming due. After completing the land sale, the Great Park Venture made aggregate distributions of $25.5 million to holders of legacy interest and $218 million to holders of percentage interest. We received $81.8 million for our 37.5% interest. Offsetting these revenues were cost of sales of $165.7 million, SG&A of $1.8 million and related party management fee expense of $27.4 million. Management fee expense is comprised of $3 million of monthly base fee payments and a $24.4 million increase in accrued incentive compensation, mostly resulting from a change in estimate of aggregate payments probable of being made as the venture makes future distributions.
As it relates to the management company, Five Point recognized $20.7 million in management fee revenues during the quarter. $3 million of which was from monthly base fee payments and a $17.7 million increase in its incentive compensation contract asset, most of which is related to changes in estimated incentive compensation payments expected to be received as future distributions are made from the venture. Offsetting these revenues were expenses of $9.7 million, comprised of $1.7 million for the cost of providing management services, primarily the project team compensation, as well as $8 million of our development management agreement intangible asset amortization expense, resulting from incentive compensation revenue recognized in the quarter.
Concurrent with the venture's distributions paid to its holders of legacy and percent interest, we collected $22 million in incentive compensation payments due under our development management agreement. We own 37.5% interest of the Great Park Venture and 100% of the management company. Although the Great Park segment reports the full interest of the Great Park Venture, our investment is reported under equity method of accounting, and therefore, the assets, liabilities, results of operations and cash flows are not consolidated within our financial statements. The company's equity and earnings from the Great Park Venture after adjusting for a basis difference was $52.3 million for the quarter. The Great Park Venture is a self-funding operation with no debt and had a cash balance of $140.9 million at the end of the quarter.
Lastly, our Commercial segment venture is a self-funding operation and had a cash balance of $5.1 million at the end of the quarter. Like the Great Park Venture, we only own 75% of the Great Park Commercial Venture. Our investment in the venture is 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. With that, I'll turn it over to the operator for questions.
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