Q1 2024 Five Point Holdings LLC Earnings Call

Participants

Daniel Hedigan; Chief Executive Officer; Five Point Holdings LLC

Kim Tobler; Chief Financial Officer, Vice President, Treasurer; Five Point Holdings LLC

Stuart Miller; Executive Chairman of the Board; Five Point Holdings LLC

Alan Ratner; Analyst; Zelman & Associates

Myron Caplin

Ken Hansen; Analyst; Stifel

Presentation

Operator

Greetings, and welcome to the Five Point Holdings, LLC first-quarter 2024 conference call. As a reminder, this call is being recorded.
Today's call may include forward-looking statements regarding Five Point's business financial conditions, operations, cash flow, strategy, and prospects. Forward-looking statements represent Five Point's estimates on the data of this conference call and are not intended to give any assurance 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 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.

Daniel Hedigan

Thank you. Good afternoon, and thank you for joining our call. I have with me today Kim Tobler, our Chief Financial Officer; Mike Alvarado, our Chief Operating Officer and Chief Legal Officer; and Leo Kij, our Senior Vice President - Finance and Reporting. Stuart Miller, our Executive Chairman, is joining us remotely.
On today's call, I'll update you on our Q1 results, on our team's focus during the quarter and the steps we're taking to implement our strategic priorities. Next, Kim will give an overview of company's financial performance and condition with some limited guidance for the second quarter and the full year. We will then open the line for questions to our management team. So let's begin.
I'm very pleased to report another strong quarterly performance for Five Point as we continue to focus on fortifying our balance sheet, controlling our expenses, and carefully managing our capital spend to match near-term revenue.
Quarterly, we're happy to report a profitable first quarter, consistent with our expectations as we started the year. Our net income for the quarter was $6.1 million, which reflects the strength of the builder interest in our two active communities. Specifically, in February, we sold 11.6 acres of land at the Great Park for $6.4 million per acre for a total sales price of $74.6 million with a 60% profit margin. This sale contributed to the $17.7 million of equity and earnings from unconsolidated investments for the quarter.
Additionally, consistent with our focus on holding down costs, we held our SG&A to $12.9 million, which is 6.5% less than the first quarter of last year. We achieved these results, but there remains uncertainty around interest rates and inflation. We've been managing our business with the assumption that interest rates remain elevated for longer than originally anticipated. While interest rates are relevant in our chronically undersupplied California market, shortages of entitled land and existing home inventory continue to drive strong demand from builders.
Moving to our balance sheet. In connection with the highly successful exchange of our senior notes, we paid down our debt by $100 million, resulting in an improved debt to total capitalization ratio of 20.9%. We ended the quarter in a healthy liquidity position with $233 million in cash and $0 drawn on $125 million revolver, giving us total liquidity of $358 million. Kim will cover more details regarding our financials during his comments.
Further validating our consistent progress, I'm happy to report that S&P Global has raised our issuer credit rating to B- and upgraded our outlook to stable. S&P also raised the ratings on our senior unsecured notes to B. These upgrades reflect the team's hard work and continuing focus on our three main priorities: generating revenue and positive cash flow, controlling SG&A costs, and managing capital spend to match near-term revenue opportunities.
Also affecting tremendous progress we have made as a team, I'd like to parenthetically note that Mike Alvarado has added new responsibilities as our Chief Operating Officer. The addition of these duties as a recognition of the expanded role Mike has already been playing for Five Point and a significant contribution to our overall operational and strategic progress. Mike has been intimately involved with the company's assets and operations going back nearly 20 years. And in his expanded role, Mike will be focused on, among other things, ensuring that we execute efficiently on our business plan and overseeing entitlement efforts across our communities. I am confident Mike will see continued success in this new role that his leadership will help drive shareholder value. Congratulations, Mike.
Let me now expand a bit on general market conditions. Notwithstanding last week's economic news on inflation conditions in our markets remain relatively strong for homebuilders to continued lack of existing home inventory, coupled with low unemployment and fairly strong consumer confidence has helped sustain strong demand for our land and our communities. The limiting factor in demand remains affordability, which is driven in large part by the impact of higher interest rates and stubborn inflation. While interest rates have been fluctuating builders have a variety of incentive structures support new home sales. With the ability to adjust those incentives in response to interest rate movements, homebuilders have been uniquely able to capture and sustained demand to allow new home sales to continue in the early months of 2024, we have seen strong builder interest in our residential land offerings as well as sustained new home demand, and we believe that demand for entitled land in our communities will continue to exceed supply on the commercial side of our business, as we have noted before, capital markets have slowed for speculative commercial development, but we are still seeing interest from both developers and users for currently viewing user offers on certain commercial sites. And we expect this interest will continue to support commercial demand. The regional housing needs assessment arena process that is ongoing in California may also give us optionality to consider multifamily our for-sale housing on certain of our commercial sites.
Let me now provide you with some updates on our communities, starting first with the Great Park Neighborhoods. As a reminder, at the Great Park is the most mature of our communities and its ongoing contribution to our financial results reflects the benefits that we and our Great Park Venture Partners are receiving receiving from the investments made in the community in prior years.
During the first quarter, building on our Great Park community sold 69 times, that number is lower than normal due to extremely limited inventory at Solus Park was only two remaining builder programs currently selling, despite the limited inventory for encouraged by sustained interest and traffic in the community, affirming the ongoing appeal of the Great Park Neighborhoods to prospective homebuyers. We believe the builders share our sentiment as we are actively engaged with multiple builders on new land sale opportunities. Our next major neighborhood Luna Park opened one out of 13 planned programs at the end of 2023, and that program has already sold out through remaining Luna builder programs are anticipated to start opening this month with openings continuing through September. As these programs open, we will once again be able to offer a wide variety of housing options in Great Park Neighborhoods.
As I mentioned in my last earnings call, we anticipated to builder sales in Q. one at Great Park. The first planned home sale closed as scheduled. The second sale required the completion of some additional work before closing to expedite this closing, we split the sale in the two phases, one of which already closed in Q2. We anticipate closing the second phase next month. As I mentioned earlier, there remains strong homebuilder interest in acquiring homesites at Great Park. And this quarter, we completed the bidding process process for a group of six new home programs for approximately 400 homesites. We are currently finalizing contract negotiations on those home sites who have also started the bidding process with our homebuilder partners for sale for new programs with approximately 300 homesites, 12 more to report on those programs later in the year.
Now I'll move to Valencia, our other active community. Valencia is still in its early stages of development with many future phases of land of liver delivery ahead of us, which will help which will also help address the land charges I discussed earlier.
During the first quarter, the builders sold 62 new homes there are now only 27 homes remaining our initial offering at 1,268 homes in our newest Valencia development area. We now have five new home earlier programs open two more still to be opened later this year. We are seeing continued strong demand in Valencia. These new offerings will augment our current lineup, and we anticipate that these openings will result in increased home sales. Six new programs is sold at in the last year, anticipated open in late 2024 for an early 25. I'm going to remain engaged with us in Valencia. On the last call, we mentioned our plan to potentially convert a 35 acre site from commercial to residential use, which is permitted under our flexible zoning. We're now finalizing an agreement to sell this 35 acre mixed use site for 179 homes with the sale anticipated close in the fourth quarter of this year. We also have three additional programs with approximately 200 homesites out to our homebuilder partners for bidding, and we expect to have more to report on those programs later in the year.
Turning to San Francisco, we're continuing to work with the city and county of San Francisco to rebalancing tariffs between our two San Francisco communities, Candlestick and the shipyard As I've discussed before, we are seeking the rebalancing to enable development of Candlestick and stand-alone projects. This would allow us to begin development at Candlestick without having to wait for the Navy's completed remediation activities at shipyard. We are very focused on obtaining necessary approvals from various city and county agencies and are maintaining momentum to activate Candlestick as initial phase of this larger mixed use community located on irreplaceable land along the San Francisco Bay.
Let me conclude by saying our first quarter has seen continuing progress on our three main priorities generating revenue and positive cash flow, controlling SG&A costs and managing capital spend to match near-term revenue opportunities. Additionally, our entire team is focused on progressing entitlements for our next neighborhoods in Valencia and in moving Candlestick forward through the rebalancing process. While economic and geopolitical events have impacted the financial markets during the quarter, homebuyers and our markets continue to show interest in our communities and believe that pent-up demand will continue to be a driving force for our land sales to builders. The underlying housing environment reflects a chronic supply shortage that is compound compounded by limited inventory of existing homes. Land development is a long game and we have continuously been improving our financial conditions. Our efforts today are ensuring we are well positioned within that long game, recognizing the importance of creating and maintaining shareholder value.
Now let me turn it over to Kim, who will report on our financial results and will provide some limited guidance for the remainder of the year.

Kim Tobler

Again, as Dan mentioned, we were pleased to see S&P upgrade both our issuer and instrument ratings to stable B, minus And B, respectively. We believe that this upgrade is reflective of our improved performance in S & P's mindful understanding of the company and its assets.
Let me give you a little more background on our operating results for the first quarter of 2024, we reported consolidated net income of 6.1 million, which included 9.9 million of revenues and 17.7 million of equity and earnings from our investment in the Great Park Venture. It also included within the revenue, 8.7 million of the revenue was related to our management services. The equity and earnings from the Great Park Venture was generated primarily from a sale in February of 82 homesites on 11.6 acres of land with a land sales price of 74.6 million and a profit margin of 60% before closing costs, the sale comes out to a $6.4 million per acre. The venture also recognized $17.6 million of profit participation or so-called pop of revenue related to prior year land sales. Consistent with our continued focus on managing our costs, our SG&A expense was 12.9 million compared to the prior year of 13.8 million.
Now let me turn to liquidity and cash. We ended the quarter with 232.7 million of cash as well as 125 million of availability on our revolving credit facility, resulting in total liquidity of 357.7 million. At the end of the quarter, our debt to total capitalization was an improved 20.9%. The things that materially impacted our cash balance this quarter were first the $100 million payment to settle our very successful senior note exchange together with 8.3 million of accrued interest and 7.6 million of transaction costs.
Second we received 24 million in equity distributions, of which 17.7 million is reflected in our statement of client cash flows as a return on our investment in our operating activities. And third, we received 6.4 million incentive compensation payment from the Great Park Venture. And we also spent 17.4 million in development costs at Valencia and $1.7 million at San Francisco.
I'd like to take a minute to emphasize the significance of the Great Park Venture in our financial results. While we are actively selling land at both our Valencia project and the Great Park Venture. The Great Park Venture is a more mature master-planned community, while Valencia is still in its early stages to that point in Valencia. We're still working through the development and sales in our first of nine villages. This first village represents only about 3,600 homesites of a total of up to approximately 21,500 home sites at our Great Park Venture. Most of the major capital costs have been incurred and our continuing capital costs generally have been or will be recovered through CFD. reimbursements to review in 2023. The Great Park Venture sold 798 homesites on 84 acres and sold another 37.9 acres of commercial land for total revenue of 532 million. The venture also recognized 21 million of profit participation or pop-up. The venture made equity distributions of $411.2 million to holders of percentage interest, of which five point received 154.2 million, five point also received 41.6 million of incentive compensation payments. Well, we consult regularly with our venture partners. Five Point is the manager of the venture, and we are responsible for the day-to-day operations and direction of the development. We currently expect to maintain the current pace of sales and development for the next several years.
Now for some limited guidance, we expect the second quarter net income to be similar to or slightly higher than the first quarter. As Dan mentioned, we have already had one sale closed at the Great Park this quarter in the second quarter and are expecting another one before the end of the second quarter. For the year, we expect a total of between 75 and 100 million of net income with the majority of that income being recognized in the fourth quarter. We are also expecting to end the year with between 250 to 300 million of cash. We continue to see positive momentum and believe that we are seeing benefits from the Company's focus and attention on our three main priorities.
With that, I will turn the call back to the operator.

Question and Answer Session

Operator

(Operator Instructions) Alan Ratner, Zelman & Associates.

Alan Ratner

Hey, guys, good afternoon. Thanks for all the detail so far. Appreciate it, Dan, I guess my question is more around some of the near-term conversations you've had with builders, it sounds like you've got a number of parcels that for bidding. And I think we're unfortunately probably three months ago, we were all hopeful the rate outlook would look a bit better than it does today and with rates climbing higher, I certainly yes, the equity markets are beginning the pricing, some risk of a slowdown. I'm curious if there's anything you're seeing in your communities either on the home sale side or in terms of the conversations with builders, that would suggest, yes, any of that, that could concern or cautiousness we're seeing in the markets beginning to filter through to to the housing side of things.

Daniel Hedigan

Thanks, Alan. It's always good to hear from you, Tom. Interesting, Alan, as I think I mentioned in my remarks, what we're really seeing here is the chronic shortage of land, in particular builder land building, buildable land entitled, land and home sites is really driving what we're seeing as we're talking to and actually actively bidding with builders. And that shortage of housing has actually seen extremely strong bids and active participation by multiple builders on everything we're taking to market right now. And once again, I think it's I know that it's California is in such a unique place. There is no new home inventory or limited and is actually limited resale inventory and limited entitled land and lots. So we are not seeing any drop-off and kind of due to the current financial market. And as I say, the the new home builders are uniquely positioned to keep sales going. And so that is that exactly what we're experienced in the market.

Alan Ratner

Great. That's encouraging to hear on the Great Park sale in the quarter. So if I look at the price per acre, $6.4 million, well above the the sales you recorded last year, I think the average is about 4.3 million per acre. And I know that's a lumpy number, and it looks like there might have been one other sale that was in the similar range that all the way back in 2019, but I think the average has been more in the fives over the last few years.
So is there anything unique to this parcel that would command a premium? Or do you feel like this is fairly representative of your broader inflation on lot prices that you're seeing in the community right now?

Daniel Hedigan

Well, one thing I'd mention to you, I know the sale that you're reflecting back to have a unique structure. And so you're looking at kind of the going in price, but the coming out price we expect to be much higher.
And then as to this specific sale, no, it really is reflective of the market. There's nothing unique about this. It really is what we're seeing in the market today.

Alan Ratner

Got it. So as we think about the next two deals you've got under contract, you have obviously is going to be maybe a little volatile, but something in the current range, I guess, is where we should think about the future sales coming in?

Daniel Hedigan

Yes, absolutely right.

Alan Ratner

Perfect. Appreciate that. Thank you very much.

Daniel Hedigan

Thanks, Alan.

Operator

Myron Caplin, a private investor.

Myron Caplin

Yes, hi, gentlemen. Yes, thanks. Thanks for that call. In running things, well, I guess you would say with the SG&A under control and so four.

Kim Tobler

Thank you. Yes, thanks, Myron. Appreciate it.

Myron Caplin

I guess one thing I wanted to ask with with the pay of this distribution at the Great Park is the legacy interest payout in the fall.

Kim Tobler

At this point, it is not a we expect it to be paid out this year in total. So there's there's about $40 million left and the other. So a moment, I'm sorry, it's not there's only 10 million left, so between the two.

Myron Caplin

So that's after this last distribution. Yes, so in Valencia, where to how can I help you if you haven't got inventory in Valencia in the end, the first village.
Okay. Except for the mix, you show me you said, Dan, as I recall, I think this year about 140 or 50 acres left. So how do you how can you really do business in talk about cash flow, but worse, how can how can you close on?

Daniel Hedigan

So Myron, one of the things that, Dan, you're certainly right. The first group of lots we opened were down to a very small inventory there. But there's another area and that there is ultimately going to be seven programs at five were opened and those are actually actively selling and we'll see more of those selling and closing later this year. And so there's two more to open. There is two more communities opening there. And then we did six communities last year in those the first one Chaumet end of this year. And the remainder have shown that at beginning of 25 so that that inventory will come that those homes will keep selling, which is why we also, as I mentioned, we have a site out to bid now with builders to keep that going. The 100, 79 homes that you mentioned, those are going to lag the market, those should be opening up next year also, if so, will we actually will where's where assuming where's where's the money?

Myron Caplin

A lot of this is of off in the future?

Kim Tobler

Yes, not not to. I mean, again, we're actively selling in Valencia this year and next year, and then we'll be announcing more about what's following that as we get closer to it.

Myron Caplin

So just one question or one item. You mentioned Luna Park. I didn't understand that all.

Daniel Hedigan

What's the situation in Luna Park View saying so look at another park was the transaction that closed early and early last year about this time last year when I think about it and they've been working on the models and there's 13 programs that was 700, 99 home sites, 13 programs. The first one was a very small program. It's open and sold out and they are now the next 12 are opening. They're starting to open this month and they're going to continue opening. And so we'll have all of those open some time this year. And once again, it's the is this we have Solus, which is winding down now, Luna is another brand new community, large community like we do at the Great Park Neighborhoods. And it is in the process of opening up all of its models.

Kim Tobler

So you'll be able to show sites as Myron.

Myron Caplin

We're still selling sites, yes, say to yourselves site because the site builders are better are selling larger homes vision as showing a larger size?

Kim Tobler

Yes. So maybe to that point, I mean, we always like to give the color on what the sales paces of the builders and then we tried it. We tried to illustrate that we're still selling lots to them as well as why Dan mentioned those additional sales respective sales perspective, sales.

Myron Caplin

Yes. Well, well, not I guess is you guys as you say it's a long game?

Kim Tobler

It certainly is. Thanks, Myron.

Operator

(Operator Instructions) Ken Hansen, Stifel.

Ken Hansen

Thanks for taking my my question. I just for full disclosure. I'm and I'm a CFA But but not representing Stifel on the call, it's I'm representing my own my own shareholder interest. I like the second priority that you've identified is the controlling of cost. And I know, Dan, when you came on board, you had a significant reduction in employee count. I think it was maybe a 30% reduction, something like that. And that's been helpful. I think I'm just wondering now what you think about the size of the Board. I think it was 11 when you came on board and maybe it's down to nine. But when you think about it and the ratio of board members employees, it seems that a bit heavy, but not a bit heavy, a lot heavy and Lennar has the same number of Board members, I think, and they have 12,000 employees. So I'm wondering if if maybe just an optics thing, but maybe it's a flexibility thing as well.
And certainly would be a cost savings if the Board were smaller. So could you just comment on the size of the current board and any interest you have in making it more nimble and responsive.

Daniel Hedigan

Thanks, Ken. Thanks for your question. The Board has been nine as long as I've been here. I don't know if it was 11 ones that you mentioned but certainly it's been nine as long as I've been here. And I can tell you that the Board actually does take a look at their function and operation every year and at this point. The Board is, um, is a functioning well, and I would just have to defer that to the Board to make those type decisions. Not to me per se, but we have a I think we have a very active board that has been very supportive from my transition into this role.

Ken Hansen

I know by adding Mr. Miller's on remote. Can he respond to that?

Daniel Hedigan

And I don't think that would be appropriate to get into debating our Board on this call, but we appreciate that. We appreciate the question.

Stuart Miller

Okay. And I am on remote. I agree with Dan.

Operator

That concludes our question-and-answer session. I'd like to hand it back to Mr. Hedigan for closing remarks.

Daniel Hedigan

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

Operator

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