Q4 2023 Five Point Holdings LLC Earnings Call

Presentation

Operator

Greetings, and welcome to the Five Point Holdings LLC fourth-quarter and year-end 2023 conference call. As a reminder, this call is being recorded.
Today's call 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 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 in Five Point's SEC filings, including those in the Risk Factors section of the Five Point's most recent annual report on Form 10-K filed with the SEC. Please note that Five Point assumes no obligation to update any forward-looking statements.
Now I would like to turn the call over to Dan Hedigan, Chief Executive Officer. Please go ahead.

Thank you. Good afternoon and thank you for joining our call. I'm going to start off by telling you that I have picked up the cold that seems to be going around to a lot of people. So if I don't sound like myself, that's the reason.
I have with me today Kim Tobler, our Chief Financial Officer; Mike Alvarado, our Chief Legal Officer; and Leo Kij, our Senior Vice President of Finance and Reporting. Stuart Miller, our Executive Chairman, is joining us remotely. In my remarks. I'll update you on our Q4 and year-end results, on our team's focus during the quarter, and on the steps we are taking to implement our strategic priorities.
Next, Kim will give an overview of the company's financial performance and condition. We'll then open the line for questions to our management team. So let's begin.
First, let me congratulate our team on a very strong quarter and year. We started the year still somewhat uncertain about the market and reluctant to make commitments to acquire additional homesites. And we finished the year with capital markets, making it more difficult for commercial developers to pursue new speculative development projects.
Yet despite those headwinds, we ended the year strongly with consolidated net income of $58.7 million in the fourth quarter, resulting in a net income for the year of $113.7 million. We're able to accomplish these results by continuing to focus on our three main priorities: generating revenue and positive cash flow, controlling SG&A costs, and probably most importantly this past year, managing capital spend to match near-term revenue opportunities.
Second, I'd like to take a moment to note that this is the most consolidated net income that Five Point has generated in a single year since its formation. We also ended the year with $353.8 million in cash and $0 drawn on $125 million revolver for total liquidity of $478.8 million.
In addition to executing on our operating priorities, we also initiated an exchange offer for our $625 million, 7.875% senior notes due November 2025 for new 10.5% initial rate senior notes due January of 2028. I'm happy to announce that on Tuesday of this week, we successfully settled with a participation rate over 99%. As part of the exchange, we reduced our outstanding debt by $100 million in which will reduce our cash balance, which will be reflected in our first-quarter release. This exchange strengthens our balance sheet and provides us additional time to monetize our land development investments and to prepare the company for growth. Kim will cover more details regarding this exchange during his comments.
Since I arrived at Five Point, we were working on a number of initiatives underlying our three main operating priorities. In particular, we have focused on our government and government relationships, assisting local agencies to deliver badly needed housing in the supply constrained markets in a manner that maintains the attractiveness, our communities to today's consumer and with product offerings at several different pricing levels. We have reengaged with the builders drawing on my deep relationships with them in order to drive higher land residuals by allowing them to design and build more efficient housing products if you've heard me speak to this in the past, and we have seen this come to fruition in our more recent land sales.
Finally, we spent considerable time to enter 2022 and beginning of 2023, analyzing the different commercial uses that could be developed on our commercial landholdings at a time, and residential was lagging, allowing us to pursue industrial land sale transactions that were able to close in Q4 despite the challenges that most commercial markets felt in the second half of 2023 for work, we have done and continue to do regarding our commercial land, allow us to be able to toggle back and forth between residential and commercial land sales as current market conditions dictate our focus on these initiatives allowed us to have a strong year, notwithstanding the changing economic climate we experienced in 2023. We intend to stay the course in 2024. So building on the successes we have achieved to date to that end, while we do not expect to have the same record-breaking earnings in 2024 that we had in 23 we do expect to be cash flow positive and generate substantial earnings, which will strengthen our balance sheet and prepare the Company for the future.
Let's now move to a market update the macroeconomic environment for most of 2023 was challenging for new home sales. The dominant theme being the impact of higher interest rates on the home buyer was a year when home affordability was tested, demand was constrained by the ability to homebuyer to purchase in that environment. Home builders assist in stabilizing demand by offering mortgage products with reduced interest rates allowed new home sales to continue even as the resale market slowed. At the end of the third quarter, the market was expecting rates to stay at elevated levels for longer than originally anticipated. However, as we entered the fourth quarter, the Fed signaled that we might be closer to the end of its tightening cycle, and we might see lower rates in 2020 for direct sales reports from builder support improvement in new home sales as interest rates moderated and homebuyers and more confidence in moving forward with a new home purchase. This has led to improvement in homebuilder confidence, which we expect will translate into greater builder demand for residential land in our communities.
California's housing dynamics are still very favorable with new home sales the housing shortage is a driving force with production constrained by availability of land, labor and materials owned and rental occupancies remain extremely tight. Clearly signaling that more homes are needed against this backdrop, we feel good about our position in the California market with entitled and irreplaceable land at Great Park in Irvine, Valencia and North Los Angeles County and at Candlestick Point in San Francisco, and we still have strong interest from homebuilders or pipeline in these key California markets.
On the commercial side of our business, several markets have slowed for speculative commercial development, but we are still seeing interest from from the user market as users have limited options if they wanted to design own and control their own facilities on a long-term basis, expected user interest will continue to support demand in this preferred asset class. We also believe that the retail housing needs assessment are selling. You may note as Reno process that is ongoing in California will give us an opportunity to add more entitled housing units, thereby creating options to consider multifamily or for-sale housing on our remaining commercial sites. But the most likely outcome being a combination of commercial and residential uses on the site. We're actually studying these options to be sure we are maximizing both land value and shareholder value.
Let me pivot now and provide you with some updates on our communities, starting first with the Great Park Neighborhoods during the fourth quarter builders and our Great Park community sold 76 homes that number, which is low by comparison to more recent quarters, was driven by very limited inventory at Solar Park are only actually selling neighborhood in Great Park despite the limited inventory. We're encouraged by the substantial interest and traffic into communities affirming the ongoing appeal of our homes to prospective buyers. We believe the builder share our sentiment as we are actively engaged with multiple builders on new land up land sale opportunities at the Great Park. Our next major neighborhood and Luna Park will debut was 7.9 million homes across 13 collections as projected out in the phases from March through December of this year. In the first half of the year in great part anticipate closing two land sales totaling 187 homesites in approximately 24 acres, as I mentioned earlier, to remain strong homebuilder interest in acquiring homesites at Great Park, and we anticipate putting additional homesites out to market during the year, which could close either this year or next.
Moving to our commercial land. During the fourth quarter, we closed on two commercial land sales totaling approximately 38 acres of land for an aggregate purchase price of 174.2 million. This was the balance of the 80 acres we had taken to market to initiate our commercial land sales program at Great Park that initially entered into these land sales agreements early in 2023 before the capital market started adjusting throughout the year perspective, it offers avoided closing on new land acquisitions. If many, if not most markets we are able to close these transactions, the ultimate closing price reflected the increased borrowing costs and higher financial returns. Institutional developers expect on spec development projects in this market. What are still strong Gregor values by even recent historic measures as we move forward in 2024, we'll look to bring additional commercial land to the market, focusing on users while using our flexible zoning to evaluate the opportunity for commercial and our residential land uses on these sites combined, which provides the highest land value. While there has been a reduction in specs of building and relevant Southern California markets, which has slowed the pace and pricing of offers for commercial land, our location in the heart of Orange County has supported continued interest in our first land for various uses, and we do not anticipate that changing in 2024.
Now moving to Valencia our other active communities during the fourth quarter to build or sell 31 new homes as of year end, 1,202 homes from our initial offering of 1,268 homes have been sold was only 66 homes remaining, which is 5% of that initial offerings in our newest Valencia development area. We now have three new neighborhoods open with four more still to be opened. We're seeing continued strong demand in Valencia. These new offerings will augment our current lineup, and we anticipate that these all these will result in an increased pace of sales. Builders remain engaged with us in Valencia. During the fourth quarter, we sold five or 83 homesites dispersed across six program and approximately 46 cumulate to acres for 101.8 million in furtherance of our our priority to minimize capital spend with with this land sale, we shifted some of the final horizontal development costs of builder. So the final consideration payable to us reflects the fact that the ability to take on these development costs as we move forward with monetizing our venture landholdings we are well-positioned to expand on our capital management strategy, both by tying our capital expenditures in near term revenue events and by structuring land sales with our homebuilder partners to where practical ship land improvement costs to the builders. We also continue to market a prime 35 acre mixed use site in the community are still marketing for commercial uses with adjustments to the commercial market, driven by changes in interest rates and expected financial returns for developers for also setting residential options for the site with our homebuilding partners, we expect to have more to report on this later in the year.
Turning to our communities in San Francisco with the passage of state legislation allows for the extension of the existing tax increment financing program for Candlestick Hunters Point shipyard for now focusing our attention on working with the city and county of San Francisco to progress the rebalancing of airline entitlements. Recall that one of the main priorities of the rebalancing is to establish Candlestick as a stand-alone project separate from temporary to the ultimate development of the shipyard site, which will be developed once the Navy has completed its remediation activities. Our timing to commence development of Candlestick is dependent on completing processing of approvals through various city and county agencies. With the state's legislation benefit the public financing program that we are building momentum to move forward with the stand-alone development Candlestick cannot stick will be the first phase of this larger mixed-use community located on irreplaceable land along the San Francisco Bay and closing 2023 was a year of both progress or redirection for five points, starting with great uncertainty in January around the direction of interest rates and finishing with a positive view around interest rates and economic growth.
Against this backdrop, in 2023, we had a record year of earnings despite the market volatility. Fivepoint has positive momentum and remain optimistic about our communities and our future has looked ahead to 2024.
Opportunities remains strong as we build on successes in our core strategies. As I noted earlier, we are positive about our liquidity and balance sheet. We are well-positioned to harvest opportunities that present themselves in this ever-changing environment. Generally and housing environment reflects a chronic supply shortage as well as a growing pent-up demand for housing has been held back by materially higher interest rates. As I noted last quarter, land development is a long game, and we have continuously been improving our financial condition with each passing with each passing quarter, we're better positioned to bring our unique land offerings to market. They're not making anymore land and there will never be an abundance of entitled land in California. Our efforts today are ensuring we are well-positioned with that long game well, while recognizing the importance of focusing on creating and maintaining shareholder value.
Now let me turn it over to Kim will report on our financial results provide some limited guidance for next year.

Thank you, Dan. For a summary of our financial results was included in the earnings release issued earlier today. And as Dan mentioned, we reported consolidated net income of 58.7 million for the quarter and 113.7 million for the year since the guidance we gave for the second half of the year was 50 to $70 million. I wanted to note that we are reporting 72.9 million in consolidated net income for the second half of the year, slightly higher than we had anticipated, and that contributed to our record full year earnings for the Company.
I'm now going to review the sources of revenue, our SG&A and other costs, the impacts of our equity and earnings for our unconsolidated entities. Our development spend our recent senior note exchange and liquidity for the quarter and for the full year. In the course of the discussion, I will give some high-level guidance and we'll finish with an outlook for 2020 for first revenue. In Q4, we recognized 100.1 million in land sales revenue, which was primarily generated by the $101.8 million sale of 46 acres of land entitled for 583 home sites to a single homebuilder at our Valencia community, we recognized a 34.7% gross margin on that sale. For the full year, we recognized 161.4 million in land sales revenue, which was primarily generated by the sale of 72 acres of land entitled for 729 homesites to three different homebuilders at our Valencia community. In addition, we recognized 18.1 million of management services revenue for the quarter, which was comprised of $3.1 million in base fee payments and 15 million in incentive compensation revenue. And for the and for the year $47.6 million, which was comprised of $12.4 million in base fee payments and $35.2 million in incentive compensation revenue. The Great Park Venture made an incentive compensation payment to five point during the quarter of $19.5 million. And for the full year, five point received incentive compensation payments of 41.6 million. Our selling, general and administrative expenses remained stable throughout the year. Sg&a was $13.1 million for the quarter and 51.5 million for the year. We generally expect to stay in that range in the coming year.
The cost of management services for the quarter was $7.8 million, which included 5.8 million of intangible amortization expense for the year was 22.2 million and included 15 million of intangible amortization expense. We also reported 1.8 million of other expense during the quarter associated with third party costs incurred for our senior note exchange transaction. I will discuss the exchange more in a moment. However, I want to note here that the exchange will be accounted for as a modification of our existing debt as opposed to an extinguishment. Therefore, third party transaction costs will be expensed as incurred in the fourth quarter of 2023 and in the first quarter of 2024, we estimate additional third party transaction costs of approximately $6 million will be incurred in the first quarter now let me turn to the contributions from our unconsolidated investments. Equity and earnings from our unconsolidated entities for the quarter was $24 million, which included 37.5%, our 37.5% share of the Great Park Venture's quarterly net income of 81.1 million or $30.4 million for us, partly offset by a basis difference amortization of 4.5 million and our share of a net loss from the gateway venture of 1.9 million. For the year, we recognized equity and earnings of 76.6 million, which included our 37.5% share of the great part ventures. Annual net income of $250.6 million or 94 million or five point, partially offset by basis difference amortization of $15 million and our share of a net loss from the grating gateway venture of 2.9 million. Given its significance to our performance, I'd like to give a little more detail about the great part ventures contribution to our earnings this quarter and this year during the fourth quarter, the venture closed the sale of two commercial land parcels to two separate developers totaling approximately 38 acres for a combined sales price of $174.2 million or $4.6 million per acre on a blended basis for both sales, the venture recognized a 59.7% gross margin on those sales. Additionally, the venture recognized 7.5 million of profit participation revenue during the fourth quarter. For the full year, the venture recognized a total of 532 million of sales revenue from residential and commercial land sales and $21 million of profit participation revenue in the fourth quarter. The Great Park Venture made an equity distribution to 5.4 $72.4 million for the full year, five point received equity distributions totaling $154.2 million at year end, the venture had a cash balance of $61 million.
Now let's turn to our development spend at our two active projects at Valencia. During the quarter, we added 13.5 million of development costs and 5.2 million of capitalized interest to inventory, offset by 1.2 million of CFD. reimbursements for a net addition of $17.4 million before cost of sales inventory relief. For the year, Valencia added 76.5 million of development costs and 20.9 million of capitalized interest to IndAS it to inventory, offset by 44.5 million of recoveries and 18.9 million of CFD. reimbursements for a net addition of 34 point $34 million before cost of sales inventory relief. For 2024, we are expecting a little higher development spend and a little more than half of the CfD reimbursements we received in 2023 during the call are now let me turn to the Great Park Venture during the quarter. The Great Park Venture added 20.6 million of development costs and 11.1 million of capitalized interest to inventory, offset by 6.8 million of CFD reimbursements for a net addition of $24.9 million before cost of sales. Inventory relief for the year venture added 86.3 million of development costs and 23.3 million of capitalized interest to inventory, offset by 89.9 million of CFD. reimbursements for a net addition of 19.8 million before cost of sales inventory relief for 2024, we are expecting the development spend to exceed 100 million with approximately a third less CfD reimbursements than what was received in 2023.
Now let me discuss the senior note exchange. As Dan mentioned this Tuesday, we successfully settled our senior note exchange, which helped us to proactively address our senior notes that were slated to mature in November of 2025. We would like to thank our bondholders for continuing to have confidence in the Company and electing to extend their relationship with us through January 2028, 99.76% of our bondholders elected to participate in the exchange, which provided for a $100 million cash payment and $523.5 million of new 10.5% initial rate senior notes with the following terms, we will be paying a coupon of 10.5% from the settlement date through November 15th, 2025, then the coupon will move to 11% until November 15th of 2026. And finally, the coupon of 12% until the notes mature in January on January 15th, 2028. The new notes have a call premium schedule of one oh four through November 15th, 2024, then one oh two through November 15th, 2025 and 100 thereafter through the maturity. A copy of the indenture for the new notes was on the eight K we filed on Tuesday. There are still $1.5 million of the old seven seven eight senior notes outstanding that will mature on November 15th, 2025. For the first two years, our interest payments will be approximately 6 million more a year than what we've paid historically.
Now let me turn to our liquidity. I'd like to emphasize Dan's earlier comments about our liquidity. At year end, we had cash and cash equivalents of $353.8 million and $125 million of available borrowing capacity under our revolving credit facility, giving us total liquidity of $478.8 million. Our debt to total capitalization was 24%. Following the close of the exchange, we still have significant liquidity and our debt to total capitalization ratio has dropped to approximately 21%. We have adequate liquidity to thoughtfully, continue the development of our three projects and prepare five for growth.
Now let me conclude, I'd like to give some limited guidance relative to 2024. We remain committed to our three priorities that is generating revenue and positive cash flow, controlling SG&A costs and managing capital spend to match near term revenue opportunities.
For the full year 2024, we currently expect to generate earnings and positive cash flow from what we can see right now, if the two sales that Dan described occur in the first quarter, it should put us on that path after adjusting for all of the exchange related payments after the first quarter, we will be able to give further guidance as to how we expect the year to develop. We are actively managing everything we can control and are not letting the business run us.
With that, I'll turn the call back to Camilla and look forward to your questions.

Question and Answer Session

Operator

Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your lines your line is in the question queue. You may press star two. If you would like to move your question For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.
Thank you. Our first question will come from the line of Alan Ratner with Zelman & Associates. Please proceed with your question.

Hey, guys, good afternoon. Congrats on all of the progress you've made this year is a busy one for you guys, but certainly entering 24, I'm much stronger financial shape than 23. So congrats on all the great work there. First, can you ran through a lot of detail, which I appreciate. Can you just reiterate what I think you mentioned there's two sales expected, I think in the first quarter. Can you can you just repeat what the mill is expected?

Or was it the 35 acres in Valencia that you were referring to further to sales in the first quarter, Alan, very first, Paul, how are you doing now and actually, it's good to it's good to hear from you. But those first two sales are in the Great Park, it's 187 homesites in approximately 24 acres.
Got it.

Okay. On so the and so you are referring to the cash flow and the profitability is specific to that, that transaction occurred.

Yes, the guidance.
Got it best.

Second question, I don't know if you'll be able to help us with this, but there's been a lot of moving pieces and especially in Valencia and Great Park over the last year or two with land transactions and maybe some rezoning or thoughts of rezoning. Is it possible just to provide a snapshot of where you sit in both of those projects today in terms of and have lots still yet to be sold, both in the residential and the commercial arena.

And finally, I want to ask you to kind of repeat that you're seeing in Valencia and which areas are you focused on in Valencia, Mission Village or frankly, to look now at the project as a whole.

Yes.

Just in terms of a current lot count that you've obviously had one fear still much earlier on, but just trying to figure out kind of what the runway is ahead of us for both of those projects?

Well, so there's the overall Valencia and I can I think we're currently centers about 17,000 lots up in Valencia that you haven't read this?

Just Alan, what I would tell you what's ready and available. There's about 131 acres at Mission Village. It's still available for sale. When you get past that we're still land planning, those other things. And so I would I would defer that to a future discussion and everybody's anxious to get that information I'm getting a lot of requests for that. And so internally, we're trying to figure out the best way to do it for right now, what's available in the near term? It's 131 acres in in Mission Village.

Okay.
That's helpful. And that does not include the commercial site that you that you referenced earlier.

I know that would include that's that's in its entirety.

That includes that 34 acres got focus, okay.

And again, that could fit and that could become residential or could state commercial where we're trying to figure out what's the best value per acre we can get.

Got it. Okay. That's really helpful.

Thank you.

And then do you have a similar number in Great Park just in terms of your kind of lots that are on the ground ready to go?
Yes.
You mentioned that the first quarter sales, is that the entirety of it with?
No.

I mean, from a standpoint of a great bargain, Great Park has a very specific entitlement for lots, about 10,500, including all the affordable. And I think right now, we probably have sold to builders and obviously, they've been sold to homeowners. But I think we're about we have about 2000, I think, left to go. I think we're about, yes, I think I'm doing the math. I think we're probably about 7,000 lots or we have 95 hundred market rate lots. So probably about probably right around 7,000 lots sold but I think the thing that we know it understand about the Great Park is that we really do have flexible zoning on our commercial land and the City of Irvine is pushing hard in their arena process. So we have I think we once again, it's always about what's going to return the most to the land. And so we do have we do have a real opportunity. Four, we did real opportunity for adding additional residential units in the Great Park and that, but that's something once again, we're studying as we think you're talking about that. Lots of it closing in the first quarter. We have other land ready to sell this year. That's entitled and ready to go and mass play that. So we have a we have a pipeline there. Once again, it's always about really trying to make sure we're maximizing the value as we go through there. But I think that Rina it will be we'll be talking about it this year. We've spent a lot of time with the City of Irvine, but I think arena will give us an opportunity to look at additional residential opportunities there so that that 10,500 number that we've always kind of looked at as our cap, we think there is a true opportunity this year to see that move. But we'll once again, it's all about land value.
Got it.

No, that's really helpful, guys. I appreciate all the detail and best of luck in the upcoming year.
Thanks.

Operator

Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one on your telephone. One moment, please. While we poll for more questions.
Thank you. Our next question comes from the line of Myron Caplin with the private investor.

Please proceed with your question via our German.

Thanks. Thank you.

From our ending my call?
Yes, he really righted the ship great venture last two years when the cycle is kicked out, Morgan Stanley in there and you are subjected to all kinds of viral rumors of imminent bank.
Yes, but put that issue behind you and which is done absolutely shown that you can sail ship shows you might say.
Okay, I have a couple of questions. About the it's changed is that you mentioned in the papers, what are the important ways at the company in which the Company is released from what you considered overly restrictive covenants gives you now that you're sorry.
Okay.

Yes, Byron, can you just clarify that?
I'm I'm just not following what you're what your question is selling only.

There were some text in somewhere in the exchange offer. I believe that management felt you were the corporation with who you're able to be able to in a new indenture, which is, I guess, a third you were able to the release for themselves overly restrictive cover?

No, we were doing No. There's we weren't release of any overly restrictive covenants. We didn't add any restrictive covenants and the old notes had a covenant strip. Just to be clear with the new with the new our notes that we did add a covenant that we will not make dividend payments or buy back stock. While it's outstanding, we're investing in the company. So that's that's what we're doing there. But that's that was the only thing we added other than what was what was already existing states, I say.

Okay. And the other.
The other thing I wanted to dance, yes, for ready to stage drive California's drive for affordable housing. I believe that there.
So going in the fall, a referendum on the ballot for a $10 billion bond for affordable housing, does that possibly help you deliver?
I have every entitled properties to the first session program.

And what I would tell you, Mike, is anything that the state does to improve the ability to provide low-income housing will ultimately provide some benefit to us in some way we're having to explore how that will occur. And so but I wouldn't say that that's going to be a boom. We have already accounted for what it takes for us to do that and most of that kind of governmental assistance would be on the margins.

Is the one question I had technically is this reimbursement this year, what you call is called CRPCFDCF.

They were Why will that reimbursement go to go because NAF. issue only because we have fewer costs that we have available to request at this time they say, Okay.

Well, no, I can say that prospect of shareholder value is way up in the blue, given quality of your land you seem to have. So yes, imaging is excellently. Thank you very much.

Thanks, Mike.

Thank you.

Operator

Thank you. We have reached the end of our question and answer session, and I'd like to turn the floor back CEO, Dan Heneghan for closing comments.

Thank you. On behalf of our management team, we thank you for joining us on today's call, and we look forward to speaking to you next quarter.

Operator

Thank you.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this. Thank you for your participation.