Five Point Holdings, LLC Class A (FPH) Q4 2021 Earnings Call Transcript

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Five Point Holdings, LLC Class A (FPH 0.32%)
Q4 2021 Earnings Call
Mar 10, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Five Point Holdings, LLC fourth quarter 2021 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 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 our most recent annual report included in Form 10-K filed with the SEC. Please note that Five Point assumes no obligation to update any forward-looking statements.

Now, I'd like to turn the call over to Dan Hedigan, chief executive officer.

Dan Hedigan -- Chief Executive Officer

Thank you. Good afternoon, everyone, and thank you for joining. This is Dan Hedigan. As I'm sure you know, I joined Five Point on February 9 as chief executive officer.

I'm joined here today by our management team, Erik Higgins, our chief financial officer, Leo Kij, our interim chief financial officer, Mike Alvarado, our chief legal officer, and also by Stuart Miller, our executive chairman. Let me begin by thanking our board for this opportunity to lead Five Point. I'd like to thank the entire Five Point team for their support during this time of transition and change. I could not be more excited by this opportunity to lead Five Point and to work to maximize return on these incredible communities.

I'm very pleased to update you on the progress of the company through the fourth quarter and the year for 2021. I will also review some of the changes that have taken place and share some thoughts about our strategy going forward. Then Erik will give an overview of the company's financial performance and conditions. We will then open the line for questions to our management team.

2021 has been a year of progress and transition for Five Point. While extraordinary work has been done to bring Five Point to its current maturity, a new start and some new approaches will help build on a strong foundation and drive maximum shareholder value. In this regard, I want to thank Emile Haddad and Lynn Jochim for their inspired leadership. I look forward to working with both of them as vital consultants for our future.

Additionally, I'd like to thank Erik Higgins as this will be his last earnings call with the company. Erik has been a consistent source of stability and high integrity for the company and has gone through its formative years. He has also been an invaluable partner over the past month as I've begun to survey the Five Point landscape. Our packed leaders lead Five Point well situated and positioned for success as we right size our business, drive efficiencies and drive shareholder value.

I feel privileged to begin with the sizable head start to those before me have provided and hope to live up to their high standards. With that said, Five Point's time is now, and it's time for Five Point to get to work. These are certainly interesting times to take the helm of a public community development company. The geopolitical world raises concerns, inflation is on the rise and interest rates are trending upward.

Nevertheless, for high-quality communities like Five Point, these are times when people are most attracted to our offerings. Americas employed, wages are rising along with interest rates, and with global uncertainty, nothing feels more secure than a high-quality home and a unique high-quality community, and that is exactly what we have to offer. We opened Five Point communities of the Great Park and Valencia continue to show strength in the current economic environment. Of course, we are somewhat burdened by constrained land supply and our builders are somewhat limited by supply chain constraints.

But business in general remains robust and demand is greater than supply. During the fourth quarter, Great Park community sold 64 homes, bringing the 2021 total to 655, which is an 11% increase compared to 2020. The reduction in homebuilder sales in the fourth quarter reflects limited inventory going into the quarter and strategic steps by the builders to limit sales to allow production to catch up to prior sales and to manage inventory as they transition sales to our new solar community, which is opening for sale this summer. Great Park Neighborhoods captured approximately 21% of new home sales in Orange County in 2021.

With the continued strong pace of home sales, we expect builders to purchase approximately 800 homesites in the fourth quarter of 2022. Next, in Valencia, new home sales totaled 146 during the fourth quarter, bringing the total to 346 homes sold since sales commenced in May. This activity is occurring within the current 14 neighborhoods, which are open for sale. We expect increased sales in additional four neighborhoods opened over the next quarter.

Given the strong sales activity, we anticipate builders to purchase approximately 350 homesites at Valencia in the fourth quarter of 2022. Finally, we will continue to focus on reassessing the development plan and approval process for outstanding San Francisco assets, making sure rationalize costs with yield. Over the next quarter, I expect to dig in and find solutions that activate these intensely valuable properties. As I get acclimated with the generally strong California housing market and our communities operating successfully, my immediate priority is to do a comprehensive top-down review of the organization with a 100% focus on driving shareholder value.

I expect my focus to be on revenue-enhancement opportunities, dynamic cost management and overall process refinement. We are organizing around our communities, and we'll focus on being sure that team is sized appropriately to support our current work effort, with an operational philosophy empowering the team and holding them accountable with measurable goals. At every turn, I expect to evaluate interactive programs where we can accomplish more with less. As we highlighted last quarter, we have five core strategies moving forward, and that focus has not changed.

First, we'll continue to be the leader in building sustainable mixed-use communities, which we believe will drive short and long-term value. At Five Point, sustainability matters. Our communities today have a great start on sustainability, especially with our net zero certified program at Valencia. But we can do better, and we will do better as we take a leadership role in engaging and developing the new sustainable community of the future.

Together with community leaders and top development professionals, we'll continue to do more to expand our efforts in that area. While the rest of the world is talking about sustainability, we remain committed to performance and action. Second, we continue to look at opportunities to enhance entitlements at our communities to address California's current housing shortage. Our housing assessment requirements set out by the state and endorsed by the governor, send the message that housing is essential, and it needs to be attainable in California, and we can play our part.

Each of our communities presents an opportunity to fill the void of this housing shortage and so much as we can help solve the housing shortage. Together with our approach to sustainability, we are hopeful that community leaders will work cooperatively with us. Third, we're also tracking a renewed strategic approach for the 23 million square feet of planned commercial opportunities in our three communities. Our communities need the proper balance of retail, office, medical and apartments to complement and support our growing residential footprint.

Given the location of and growing population within our communities and the investments we have made in infrastructure and amenities, we are seeing increased interest for our commercial land holdings, where our mixed-use zoning allows for a multitude of uses, allowing us to respond to the evolving commercial market. Fourth, as I noted earlier, we have an irreplaceable asset in our San Francisco properties. It's a priority to move development of these properties forward. And over the next quarter, I'll be working with our team to identify the next steps to make that happen.

And fifth, as I have also covered, we'll optimize and rationalize our cost structure to properly fit the size and scale of our business. We expect to see that we will look to do more with less and hold ourselves accountable as we drive bottom line performance and focus on building shareholder value. So that is our focus and our plan. Our entire management team and our company will remain focused on enhancing shareholder value.

Let me conclude by saying that our irreplaceable assets and strong business conditions leave me optimistic about both the short- and long-term future of the company, while the recognition that we are in a dynamic market, and we need to always remain proactive and focused on the overall market. We've clearly defined strategies and the commitment to excellence by our associates. We'll continue to lead in sustainable community development while we focus on maximizing returns and driving shareholder value. It's time for Five Point to get to work and move our business forward.

Now, let me turn it over to Erik to report on our financial results.

Erik Higgins -- Chief Financial Officer

Thanks, Dan. As so many of our financial results was included in the earnings release issued earlier today, I'll begin with our results for the fourth quarter and conclude with a summary of our annual results. As Dan mentioned, while the macroeconomic environment is uncertain, the economic fundamentals in our markets continue to be favorable for strong demand for housing and a persistent undersupply of entitled homesites. Our financial results in the fourth quarter reflect this strength as the company sold 643 homesites in Valencia.

For the fourth quarter, total consolidated revenues were $182.2 million. Net income was $47.5 million, of which $25 million was attributed to the noncontrolling interest and $22.5 million was attributable to the company. Our cash position increased by $74.3 million, and we had no borrowings under our $125 million corporate line of credit. Debt to total capitalization at the end of the year was stable at 24.7%.

Net debt to total capitalization at the end of the year taking into account our cash balance of $265 million was 15.9%. The company has four reporting segments: Valencia, San Francisco, Great Park, and Commercial. Segment results for the fourth quarter are as follows. The Valencia segment is consolidated for accounting purposes.

Total revenues for the Valencia segment were $173.3 million for the fourth quarter. We sold 643 homesites with a base purchase price of $167.3 million and we recognized $5.1 million in marketing fee revenue, which we expect to collect as homes are sold. 123 of the 643 homesites generating revenue of $43 million were sold to the Valencia Landbank Venture in which Five Point owns a 10% equity interest. Five Point contributed $3.6 million to the Landbank in the fourth quarter.

The land sales at Valencia had a gross margin of 32.5%. Cost of land sales in the quarter were $106 million, which included a $10 million offset to cost of sales as a result of the resolution of a contingency associated with an accrued obligation related to a prior year land sale. The Valencia segment profit was $60.6 million for the quarter. The San Francisco segment is also consolidated for accounting purposes and recognized a loss of $2.1 million for the fourth quarter, which was primarily related to SG&A for the segment.

The Great Park segment includes operations of the Great Park Venture, the owner of the Great Park Neighborhoods, as well as the management services provided by the management company to the Great Park Venture. As a reminder, we own a 37.5% interest of the Great Park Venture and 100% of the management company. The operations of the Great Park Venture are accounted for under the equity method of accounting, and therefore, the assets and the liabilities of the Great Park Venture are not included in our consolidated financial statements. The Great Park Venture is a self-funding operation with no debt and had a cash balance of $140 million at the end of the year, which is not included in Five Point's consolidated cash balance.

For the fourth quarter, the Great Park segment revenues were $24.2 million, which were primarily related to the sale of eight homes under the previously announced fee build program and management fee revenue recognized by the management company for services provided to the Great Park Venture. There are no land sales at the Great Park in the fourth quarter. The net loss for the Great Park segment was $4.7 million in the fourth quarter, which was comprised of approximately $2 million in income from the management company and a $6.7 million loss from the Great Park Venture operations. The company's equity and loss from the Great Park Venture after adjusting for a difference in investment basis was $1.9 million in the quarter.

Our commercial segment includes operations of the Gateway Commercial Venture and management services provided by the management company to the Gateway Commercial Venture. We own 75% of the Gateway Commercial Venture and 100% of the management company. After the prior year sales of three of the four buildings on the campus, the Gateway Commercial Venture currently owns one office building, totaling approximately 180,000 rentable square feet and development rights for future expansion within the campus. The operations of the Great Park -- of the Gateway Commercial Venture are accounted for under the equity method of accounting, and therefore, the assets and the liabilities of the Gateway Commercial Venture are not included in our consolidated financial statements.

Commercial segment revenues were $2.2 million for the quarter. Commercial segment income for the quarter was $381,000, and the company's equity and loss from the Gateway Commercial Venture was $210,000. So wrapping up 2021 for the year, at Valencia, we closed the sale of 643 homesites. At Great Park Neighborhoods, the Great Park Venture closed the sale of 887 homesites and 16 homes.

The company received $98.3 million in distributions and incentive compensation payments from the Great Park Venture. Before adjusting for equity method accounting, total revenues generated from the four segments was $668.6 million. SG&A decreased by $6.4 million or 7.6% to $77.1 million for the year. While we continue to make year-over-year progress on reducing SG&A, as Dan mentioned, we are focused on achieving additional reductions in SG&A expenses in 2022.

Consolidated revenues for the company were $222.4 million. Consolidated net income was $13.3 million, of which $6.7 million was attributable to the noncontrolling interest and $6.6 million was attributable to the company. The company's liquidity position remains strong with a cash balance of $265 million and new borrowings under $125 million unsecured line of credit. With that, I'll turn it over to the operator for questions.

Questions & Answers:

Operator

[Operator instructions] And our first question today will come from Alan Ratner with Zelman and Associates.

Alan Ratner -- Zelman and Associates -- Analyst

Hey, guys. Good afternoon, Dan. Great to hear you on the call. Welcome aboard.

And Erik, good luck in the next endeavors. It's been great working with you these last few years. So thank you for the detail, and Dan, I know it's probably a bit of an unfair question because you've only been in the seat for a month, but you kind of walked through the high-level areas of focus, the revenue enhancement, the cost management. And I'm just curious if you're willing or able to put some kind of rough number targets behind any of those, recognizing that the SG&A has been on the decline, but it sounds like you have more aggressive expectations there, and certainly, land sales have taken off in Valencia.

But can you give us any quantified targets at this point yet or at least talk high level of where you see those numbers going?

Dan Hedigan -- Chief Executive Officer

Alan, in the 30 days, I've tried to cover a lot of territory. And certainly, the land site is pretty easy to meet my head around. But I have not been able to quantify that yet. I think there's a lot of opportunity there based on a lot of past experience I have, but I haven't been able to quantify it.

I mean, it's a good question. It's one I'm thinking about every day, but just not ready yet.

Alan Ratner -- Zelman and Associates -- Analyst

Understood. Yes. No, I appreciate that and kind of what I was expecting, but just figured I'd throw it out there. Second, just maybe focusing on Valencia a little bit.

So it looks like things are obviously off to a great start there. And I think the lot sale this quarter was a bit greater than was communicated on last quarter's call. If I heard it correctly, I think you're expecting the next round of lot sales to only be about 350 homesites in the fourth quarter. That seems to be well below kind of what the project is absorbing based on your closings over the last year.

And obviously, I'm sure the demand in the market is insatiable right now for more lots. So I'm curious what's driving that that reduction in expectation for lot sales? And what -- how we should think about longer term, what the right annual number is there?

Dan Hedigan -- Chief Executive Officer

I think trying to get it on the cadence on sales is something that I also want to look at. But I think what I have been looking at up there is that we've actually sold 1,866 lots to builders. If we include kind of this quarter's sales, we're -- 500 or so of those have been absorbed. And so, we want to make sure that those are absorbed and can be priced -- the homes can be priced up for everyone's benefit before we put more product out there.

And then, there's also just this whole balancing lot deliveries and absorption kind of capital going out the door. So it started off with a big push, and there's a lot of capital we get it going. So off a big push. And now we really want to try to get it.

So like you say, kind of an annual cadence that we can kind of manage kind of more just in time for both land and homes. And so, that's -- the number is lower and it's later, but we want to have -- we want to have all the builders catch up. There still is that supply chain challenge on the builders, cycle times are a little bit longer. And the last thing we want to do is have lots overhanging so we can't really maximize the value of them.

Alan Ratner -- Zelman and Associates -- Analyst

Got it. So just to be clear on that, though, Dan, when you're saying you want the builders to catch up. It's not a situation where there's actual inventory of homes sitting on the market there. It's more just they can't get the homes built at the rate perhaps that you had sold the lots over the last year or two, so kind of giving them some opportunity to catch up there.

Is that correct?

Dan Hedigan -- Chief Executive Officer

That's correct. There is no standing inventory. It is truly just the construction process and cycle time.

Alan Ratner -- Zelman and Associates -- Analyst

Got it. OK. I'll get back in the queue. I don't want to take up -- monopolize all the time here.

But thank you. Appreciate it.

Operator

[Operator instructions] Our next question will come from Patrick Clavin. [Operator instructions] And our next question will come from Chris Reynolds with Neuberger Berman.

Chris Reynolds -- Neuberger Berman -- Analyst

Oh, I know your time with the company has been brief, but I'm wondering if you can comment about the price of the stock and the substantial discount that currently exists compared to the stated book value? I know you have a very complicated financial structure. But can you provide some observations about why you believe that discount exists? And what these actions could be to attempt to narrow that discount over time?

Dan Hedigan -- Chief Executive Officer

Yeah. Chris, thanks for the question, but I am not in a position where I can do that. I appreciate the question. I appreciate why you're asking it.

But my 30 days doesn't give me any opportunity to really answer that with meaningful information.

Chris Reynolds -- Neuberger Berman -- Analyst

OK. Thank you very much.

Operator

[Operator instructions] And that does conclude the question-and-answer session. I'll now turn the conference back over to you.

Dan Hedigan -- Chief Executive Officer

Thank you so much. Really appreciate it. Thanks, everyone, for listening in. So long.

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Dan Hedigan -- Chief Executive Officer

Erik Higgins -- Chief Financial Officer

Alan Ratner -- Zelman and Associates -- Analyst

Chris Reynolds -- Neuberger Berman -- Analyst

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