Five Point Holdings

Good day, everyone. Welcome to the Five Points Holding Second Quarter 2020 Conference Call. Currently, all participants are in listen-only mode. As a reminder, this conference call is being recorded. Today's conference may include forward-looking statements regarding Five Points business, financial conditions, operations, cash flow, strategy, and prospects. Forward-looking statements represent only Five Points estimates on the date of this conference call and are not intended to give any assurance or as to the 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 actual results or activities 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 SEC filings. including those in the risk factors section of the most recent annual report on Form 10-K and quarterly report on Form 10-Q, filed with the SEC. Please note that FivePoint assumes no obligation to update any forward-looking statements. And now I'd like to turn the call over to Mr. Emil Haddad, Chairman and CEO of FivePoint. Please go ahead, sir.

Thank you very much, operator. Hello, everyone. And I hope that as we have this call, everyone on your side is healthy and safe. On the last running call on May 21st, we shared with you that the company had implemented a COVID-19 contingency plan, which was focused on preserving our strong liquidity position. The levers that we pull on to do so are, one, an ability to shut down two-thirds of our operational expenditures on short notice, and two, that 50% of our employment-related G&A costs are discretionary. In May, we shared that in light of the uncertainty at that time, we had shut down all land development activities except those needed to support our existing builders. We did that assuming the economic conditions were going to halt land acquisitions by builders. We also shared that we had started seeing home sales go back to a pre-COVID-19 level at the Great Park, but we didn't have enough data to draw any clear conclusions. The good news is that today we can look back and see a very consistent sales pace over the 12 weeks since our last call. The median number of home sales in the first quarter was 10 sales per week. In the second quarter, it was eight sales per week. And so far this quarter, there have been 12 sales per week. I am sure that most of you have seen the strong reporting of sales from the public builders. We see the positive sentiment of builders reflected in the engagement we have with them on purchasing home sites in Valencia. We also see it in the continuation of construction by our existing guest builders. In addition, The feedback we are hearing is that many homebuyers, as a result of COVID-19, are making the move to lower-density communities with extensive open space and trails and close proximity to employment and major health care facilities. That's making our communities very attractive. On the last call, we also shared with you the sale of 70 homesites in Valencia, which is reflected in our second quarter financials. The sale, as reported, included a portion of the purchase price payable through seller financing that comes due in December 2020. Last week, the builder chose to pay off over 90% of the seller financing much earlier than the due date. Today, we close the sale of the two Broadcom buildings at the Five Point Gateway campus. When we announced the sale on June 26th, the Orange County Business Journal reported that this sale was a new high in terms of price per square foot at $537 per square foot versus previous highs in the $400s per square foot. Similar to other transactions, we retain the right to repurchase the buildings if the buyer decides to exit in the future. If you recall, that's how we repurchased the campus from dot-com. Our vision of building fully integrated, multi-generational communities with world-class sports and entertainment amenities, as well as excellent public schools, has not only attracted homebuyers, but now investors and users of commercial space, all of whom can see the accretion in value that is created by the synergy of the live, work, play, learn, and connect elements. Previously, I mentioned that I have been asked to serve on the Governor's Task Force on Business and Job Recovery. I am serving as a co-chair of the Finance and Infrastructure Committee and can tell you that housing has been identified as a top priority as the lack of housing supply in our markets has not changed and, if anything, has only gotten worse as a result of COVID-19. This month, we launched our new website at fivepoint.com If you have time at home, we encourage you to explore the site. It is a good tool to understand the company strategy and its approach to community building. Finally, I hope that you stay healthy and that the positive trend we are seeing continues. Until the visibility of the road ahead is clearer, we will keep one foot on the accelerator and one foot on the brake. Thank you.

Thanks, Mel. This is Eric. Our 10Q was submitted on August 7th, and a summary of our financial results was included in the earnings release issued earlier today. I'll start with our consolidated results and then address each of our four segments and conclude with comments about our balance sheet and liquidity position. The company's consolidated revenues for the second quarter totaled $24.3 million, and primarily consisted of a land sale at Valencia generating $17 million and recognition of revenue generated from management services. We recognized $23.9 million in earnings from our two joint ventures, including earnings of $28 million from our 75% interest in the Gateway commercial venture. Total consolidated costs and expenses were approximately $34.3 million, including $11.9 million in cost of sales related to the land sale of Palencia and $16.3 million of selling general and administrative expenses for the quarter. Net income for the quarter was approximately $14.2 million, of which $7.6 million was allocated to the non-controlling interests, leaving $6.6 million attributable to the company. Moving to segments. The Valencia segment is consolidated for accounting purposes. Revenues for the Valencia segment were $17.9 million, primarily related to the closing of 70 home sites during the quarter for a base purchase price of $16.6 million. The sale generated a 30% gross margin and was structured with a 10% cash payment and a $14.9 million note due in December of 2020. As Emile mentioned, the net was reduced by approximately $13.9 million during the third quarter prior to the maturity date. The Valencia segment income for the quarter was $1.7 million. The San Francisco segment is also consolidated for accounting purposes. The San Francisco segment's net loss for the quarter was $2.5 million, which was primarily STNA expenses. The Great Park segment includes operations of the Great Park Venture, the owner of the Great Park neighborhoods, as well as management services provided by the management company to the Great Park Venture. As a reminder, we own 37.5% of the non-legacy percentage interest of the Great Park Venture and 100% of the management company. The Great Park Venture is an unconsolidated entity with our investment in the venture accounted for under the equity method of accounting. For segment reporting, we include the full results of the Great Park Venture at the Venture's historical basis of accounting. The Great Park Venture is a self-funding operation with no debt. The Great Park segment revenues were $6.8 million in the second quarter, consisting primarily of revenue recognized under the management agreement. The second quarter net loss for the Great Park segment totaled $10.2 million, consisting of $1.8 million of net income related to the management company and a loss of $12 million for the Great Park Venture operations. The company recognized a loss of $4.1 million on its investment in the Great Park Venture, which includes our share of the Great Park Venture's loss. 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. The Gateway Commercial Venture is an unconsolidated entity with our investment in the venture accountable under the equity method of accounting. For segment reporting, we include the full results of the Gateway commercial venture at the venture's historical basis of accounting. The commercial segment income was $37.4 million for the quarter, primarily related to the sale of 11 acres and a 189,000-square-foot building to City of Hope. The real estate was sold for $108 million. The company recognized approximately $28 million of income on its investment and the Gateway Commercial Venture. The Gateway Commercial Venture made a $75 million cost distribution to its members during the quarter, of which 5.75% share was $56.3 million. As Amir mentioned, today the Gateway Commercial Venture sold two buildings currently occupied by Broadcom for $355 million. We expect the venture to make a cash distribution of approximately $100 million in connection with the sale, of which 75% will be distributed to FivePoint. When combining this sale with the City of Hope and excess entitlement sale, the venture has generated approximately $481 million compared to the venture's $443 million acquisition price in 2017. The venture and its members have recovered the initial investment, and the venture still owns one of the four buildings on the campus and development rights for future expansion. I'll wrap it up with a few comments related to our balance sheet and liquidity position. As of June 30, 2020, total liquidity was approximately $339.7 million, which is comprised of cash and cash equivalents totaling $215 million and borrowing capacity of $124.7 million under our unsecured revolving line of credit. Our balance sheet is solid with a debt-to-total capital ratio of 25.4%. With that, I'll turn it back to the operator, who will now open it up for questions.

Well, thank you. If you would like to signal with questions, please press star 1 for your touch-tone telephone. If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, star 1 if you would like to ask questions, please, star 1. Our first question will come from Alan Retner with Zellman and Associates.

Hey, guys. Good afternoon. Great to hear you guys are all doing well, and congrats on all the progress, especially on the commercial side this quarter. First question, on Valencia, I believe last quarter you mentioned that you guys kind of were halting the land development but still had about 500 lots that were either developed or pretty close to fully developed that you could sell if demand picked back up, and it certainly seems like it has. So just curious if you can give us an update. Is development activity back on in Valencia, and do you expect to sell those 500 lots by year-end?

Hey, Alan, glad to hear you as well, and thank you. Let me just make sure that I think we have numbers that might be mixed up. We have a little bit over 1,000 home sites, to be accurate, 1,038 home sites in the first phase that we did the land development for. I think the 500 you were referencing was what I was guiding in 2019 as a potential number of home sites. If you recall, the demand was higher than we expected, and we ended up actually selling 781 home sites. And that left us with 257 home sites in terms of spending inventory. I think the last time when we had the call, I talked about the fact that we have had some interest from builders, notwithstanding the situation back in May. And the good news is today we have multiple builders who are engaging with us. And whereas we talked about potentially selling the 257 in inventory, today there's an interest in more than 400 homesites, which means that we will probably go beyond what's standing inventory and do some more land development to meet the demand. So that's where we are. It's actually... really doing very well, and I am happy to see that the builders are all very excited to be up in Valencia. So the simple answer to the question is we are going beyond what we have in standing inventory, and we will be moving forward in some more land development once we firm up these agreements with the builders.

Got it. Yeah, those numbers are matched up. I think I was just adding the 257, and I think you had given roughly another 200 or so that you mentioned you could move pretty quickly on. So I think we're talking the same thing here. But in any case, just to clarify there, so development, if I think about just from a cash flow perspective, things should be ramping back up pretty close to where they were pre-pandemic over the next quarter or two?

Well, I mean, look, I mean, no cash. We've been doing nothing but keeping an eye on cash and liquidity since March 16. And as you can see, I mean, there's some opportunities on the cash that we were not contemplating, such as the closing of the deal today. It's very hard to tell you and project forward because we are still in a very fluid market condition. And as much as we are optimistic and we hope that things are going to stay, The four of us, the top four people are in the company every day. Everybody else is remote. And we really have a finger on the pulse, you know, in real time. So, you know, I'm hoping that we will be back to the same market conditions, the same cash flows. And I think it would be a mistake for me to extrapolate today until we see a little bit more of what's going to happen over the coming few months, especially as we head into an election season. and we all know that this is going to be a little bit of a turbulent election.

Understood. Yeah, absolutely. It'll be an interesting few months for sure. And then just out in Great Park, maybe you can give us a quick update just on the next phase there. I think we saw something about maybe you guys doing some fee-building relationships there, so I believe that's new. So what's the update there, if you can give us one?

Yeah, we are, and thank you. We... So in terms of the sales of home sites, what we do at the Great Park, and I think I went through the last time, is we measure on a weekly basis the velocity of sale and the burnout of each of the different product lines. And we then start to dovetail the next sale of home sites to match the timing of when the build-out of a certain product that might be similar to something we're bringing to the market and therefore we don't create an overlap which then starts creating downward pressure on pricing. So we, right now, in terms of on-site sales, we are not projecting any sales this year, but we're watching the velocity of sales. And as I said, we're seeing a higher median number of sales in the last few weeks. So if we see that the sales are accelerated, we have an ability to very quickly bring home sites online earlier than expected. In terms of the fee bill, so here's what's happened. We go to the builders now, and we have different multiple products, and we tell them what our price we're asking for is. And in some cases, some builders might have a little bit of a resistance to a certain price of home sites of a certain product. And we're not going to discount our land. I mean, we've made it very clear that we are not going to be discounting our land. This is a replaceable land. So if we find ourselves with a product that might not get the same type of appetite from builders, we will build it ourselves. And since we do not want to be a home builder, we have a very good relationship with the new home company. Larry has been a friend and knows this market extremely well. And as a result, he becomes our fee builder. He doesn't have, you know, really the ability to buy as much as the public can buy because of the price of land that we sell at. But this gives him an ability to be in the marketplace, in the market that he knows, and gives us an ability to ultimately get the price per acre that we expect to get for a product that, you know, certain builders might not have the same conviction as we do. And you're probably going to see this continue, you know, even in Valencia because, you know, when you develop 10 to 15 different product lines and with the universe of builders syncing with the consolidation, you know, it used to be that I used to go to 22 builders and almost every product would have somebody who would be willing to pay the price. But as you know, We don't have that number of builders today, and some builders might say, I don't like this price, or the high end might be concerning me, or I'm worried that certain builders might press down on me. So we're willing to do that. We believe in our own product.

I know I asked a bunch of questions, but maybe just I can hang up. That's okay. I'm just curious how that might flow through your financials when that ultimately does come to fruition, because is it just going to come in like a home builder P&L revenue for the home sales, or should we think about that differently?

No, it will come through just as homes are sold.

Got it. Okay. Perfect. Well, thanks a lot, guys. Good luck with everything. Thank you. Stay safe.

And our next question comes from Truman Patterson with Wells Fargo. Yeah, this is actually Paul Cebulski on.

I guess just kind of a bookkeeping question. First of all, how many lots do you have remaining at the Great Park?

I can give you the exact number, but I'm going to say probably about $4,000-ish. But as you're speaking, Lynn is going to look up for the exact number and we'll tell you. I'm going to get somewhere in the $4,000. We'll get you the number. If you have another question, by the time we answer that, she would have that number.

Okay. And you mentioned the cash distribution from the gateway sale this quarter. What type of gain are you expecting to book on that?

Okay. So on the sale that closed today, obviously we still have to go through our accounting analysis and the transaction needs to be reviewed by our auditor. But I'd say based on the purchase price and our initial analysis, the venture will probably recognize a $70 to $75 million gain on that sale. Okay. And then 75% of that gets pushed to 5%.

Okay, that's good. And then more of a theoretical question, the retail entertainment office environment has changed dramatically here over the past several months. How do you look at the commercial side of your business amongst the three projects and any kind of changes you might foresee in the future or the timing of bringing some commercial projects to the market?

Well, I mean, way before COVID-19, we actually started pivoting more towards healthcare-related commercial uses in each of the communities, actually. And, you know, the City of Hope transaction was a great example of that, and then you're going to see more of that that happens. So, if anything, I would say healthcare is going to become more in demand, both in terms of treatment as well as research. In terms of the entertainment, obviously things are on hold right now. We have some facilities where we're working with our partners at the city of Irvine right now on doing the drive-in movie theater and working on activating some of the food and beverage as a delivery in outdoors. So, you know, we're being creative as everybody else. We don't have a big component of that. We just look at it as an amenity. But I can tell you, I think that it is, as I said before, it would be a mistake for people to extrapolate from this moment and assume that, you know, the environment of social interaction or, you know, food and beverage and entertainment is not going to come back. As a matter of fact, I'm willing to bet that once people know that the virus is behind us, there's going to be such a huge pent-up demand for people to socialize. We're seeing it right now with people taking risks. But if anything, the type of entertainment elements that we include in our communities is going to become even more of a demand. But in terms of the office, right now we don't have anything on the drawing board for the office except for health care. And I think that we'll see what happens and how employers and how employees and how consumers adjust their behavior as a result of this. And we'll see it. But, again, the young generation is telling us something loud and clear. They're willing to take the risk because they cannot but socialize. And I think that for that generation, the line is very blurry between social activities and work. I think, if anything, I think that the office space has become more of an interactive space. But, again, let's wait and see what the end result looks like. But for us, we're not making any changes, and we don't have anything that we have to really be concerned about. In terms of the number of home sites, we have about, going back to your first question, we have about 4,500 home sites to maintain.

Okay. And just quickly again, the absorption that you gave earlier in the call, those were just for Great Park, correct? Or are you actually selling now at Valencia?

You're talking about the median numbers that I gave for sales?

Yeah, the 10, 8, and 12.

Yeah, those are for the Great Park. We have not started selling homes yet in Valencia.

Okay, that's what I thought. I just want to clarify. All right, thank you. I appreciate it.

Of course.

And next will be Michael Reha with J.P. Morgan. Again, go ahead, sir. Your line is open for questions.

Oh, sorry. Sorry. Okay. Can you hear me now?

Yes, we can.

I don't think so. Yeah, sorry, no. Hi, this is Elad Helman on for Mike. So first, just congratulations on the sale of the two buildings, the 5.8-way campus. I was wondering if you could provide some more details on the purchasers, the timing around the cash distributions, and thought around any development plans for the last remaining building.

You're coming in a little bit more, but let me just make sure that I understood the question. The question was, you wanted to get a little bit more clarity on the distribution of the cash as a result of the Broadcom closing, and you wanted to get a little bit more of a feel for additional development within the 5.0 gateway? Was that the question? Yeah, yeah. Okay. So, you know, for the distribution, I think this is going to happen very quickly. I know that Eric, when do you expect the distribution to happen? Probably within the next month, 40 days. Yeah. So, you know, this is something that's going to happen quickly. And, you know, this obviously adds to our strong liquidity, which, again, I mean, I think that every CEO in the country today, that's the number one thing that they're looking for is making sure that the liquidity is in good position. In terms of the future, what we have right now, approval for here is we have an ability to build and we can adjust the uses. We can build about 200,000 square feet of office or we can build about 100,000 square feet of medical. Right now I can tell you the thinking is to build the medical. We have demand right now for all of the medical space which will be very complementary to what we have in City of Hope and we also can bring back entitlements from the project, the bigger project, the Great Park, and an enhanced gateway as we start looking ahead. So in terms of near future, we are starting to work right now on planning of about a 95,000 square foot facility that probably will be an outpatient surgery, spine, and imaging and things like that where we have a demand for that right now. We have users who want to be there. Okay, great.

And my second question, I was just trying to understand a little bit better, you know, the sort of development plans and sales in Valencia for the second half of the year. You mentioned that there was interest from home builders for another 400 home sites. You have 257 in inventory, another 230 largely completed. So I'm just curious, like, what what the hesitation is in terms of being able to potentially close more deals there in the second half of the year? You know, is it more just market uncertainty? Is it constraints from labor or anything else, any other thoughts around Valencia?

No, we don't have any constraints from labor. And the thing that I think we look at is making sure that... that restructure a deal that hits our price that we would like to see and puts the builders in a position to be comfortable as they execute the program. And today, I mean, you have builders who have more of an interest in a cash acquisition. Some builders have a relationship with land banks. Others are looking for takedowns. Some are looking for some type of rolling option. And the good news for us is we can do any of those And those are the discussions we're having right now with the different builders. And we'll pick the builders that we feel optimize the value for the community and for us. So, you know, we're not under any pressure to do anything by your hand. And all these discussions will end up being concluded based on what makes sense for us and what makes sense for the builders. So in some cases... we will pick somebody who might say I'm willing to pay a cash price. In some cases, we'll be very happy to do more of a turn type of a deal or even include some of these acquisitions in some of our relationship with land banks for those who might want to land bank. So the answer is the sacred cow for us is irreplaceable land that we've worked on for two decades to get here, and we are not going to go ahead and do something that discounts that land and disrupts the pricing structure for those who have already made a commitment from the builders community to those, because we will not be doing any builders any service. And the good news is we have the cash and the liquidity to be able to do that.

Very interesting. Okay, thank you. Sure.

And once again, if you would like to signal with questions, please press star 1. Again, star 1. Our next question will come from Steve Kim with Evercorp ISI.

Yeah, thanks a lot, guys. I appreciate all the colors so far. I've got a few scattered ones here, but just generally, to start off at a higher level, Emil, you talked about the strength of the market, I believe, being fluid was the word you used. And, you know, as a result, you didn't want to extrapolate demand, you know, too confidently into the next few months, which is understandable. But I wanted to clarify, have you actually seen volatility in your week to week demand traffic, that kind of stuff? Or is it or has it been very steady and strong, but you're just overlaying a dose of conservatism?

Well, we have not seen volatility in our markets. What I have seen is more of a psychological reaction to numbers that are coming out on the virus and people who are talking about second wave and third wave and things like that. People are talking about the economy. So this is not feedback I'm getting from our builders or the buyers. This is me looking and saying, if I am a buyer... and I keep on hearing from people that the economy is going to be bad or that we have a second wave, I might hesitate. And you couple that with two and a half months away from what appears to be a very polarized election in a market like ours where a lot of our buyers are discretionary and they have the ability to wait. I am very cautious about saying that because I've seen great five, six weeks before that that trend might continue into the eye of the storm or could be an overlap of the second wave with the election. I'm a very cautious person about these things when I watch them. That's where it's coming from.

Yeah, that's what I figured. It's sort of asymmetric risk when you're a large landholder like you guys are. So I get it. That makes perfect sense. I just want to make sure it was squaring with what we were seeing because we had not seen any kind of volatility. It's just been uproariously strong thus far. So I just wanted to clarify that. Following on, can you speak to how pricing has been progressing at Great Park? Have you seen any ability to have an upward inflection in pricing recently?

In Old Canberra, I have not followed carefully price movement the way I would follow it in a more stable market. It's been more looking at what we've seen from the builders in terms of number of sales, the quality of the buyers, and their ability to qualify and close. But we haven't heard anything in terms of price declines. But I'm going to bet that it's probably more sloppish in the last five, six weeks. I think they're going to get more focusing on making the sale rather than trying to push the price 3% or 4% up.

Yeah. Okay. And then with respect to in-gateway, I think you, in addition to the 100, well, let's actually talk about the 100 square feet of medical space that you say that can additionally be developed. I'm curious if, as we think about the high valuation you got per square foot for the more recent one, I'm curious, are there certain trends in labs or other aspects of the healthcare demand such that you're going to see a particularly strong premium for new build. I'm just wondering whether or not there's just sort of some emerging trends there on the healthcare side such that retrofitting space is not really conducive in the same way that moving into a new space like you could offer would be.

Well, Steve, I tell you, you've heard me say that for many, many years. I think what we're seeing and what we're hearing is that people who are looking at office right now, whether it's health care or whether it is R&D, are not only looking at the building. They're looking at what else can they provide to attract talent. And that's why we have focused for so many years on building the communities we build where, Today, if you're building a medical facility over here, you have housing, you have public education, you have open space, fields, everything else. I think it's the synergy, as I said, of all these elements coming together that's what's driving the premium. And I think that's what we're hearing, is that when people are looking at our office building, they're not looking at the office building. They're looking at the community itself and the fact that they live in a community that has all this access, and therefore they can attract the talent that they want to attract.

Yeah, makes perfect sense, sure. And then lastly, I think you alluded to the fact that there was some remaining acreage, and I just wanted to get some clarity around, in addition to the 100 square foot of medical space that you can develop, is there a certain amount of acreage that could also at some point be subject to future development rights?

Sure. So let me just remind you that when we sold the land to Broadcom, we sold it with entitlements of 2 million square feet, And the first million square foot was the first place that Brockham built with the idea that they're going to build another million square feet. And that's when they were thinking this was going to be the headquarters. So obviously, we have the ability to build 2 million plus square feet. So far, this is only about a million square feet. So the answer to your question is, if we decide to intensify the land that exists within the pipeline gateway, we can add probably another million square feet over here easily. and build it here. So it's something that we have the ability to do.

Got it. Okay, that's very helpful. Great. I think that was what I needed. Okay, thanks a lot, guys. Congrats.

Thank you, Steve. Stay healthy.

Thank you. That does conclude the question and answer session. I'll now turn the conference back over to Mr. Haddad for any additional or closing remarks.

Well, I want to thank everyone for dialing in. I just want to make sure that we correct one number that we gave on the remaining number of home sites going. It turns out that I was right with 4,000 and Vin was wrong with 4,500. So it's 4,000 home sites, just to make sure that at least the record is clear. I hope that we will have another call when everybody is healthy. And, again, we are always available for any type of discussions you guys all might want to have after the call is over. So I appreciate you dialing in. Please stay healthy, and until the next quarter. Thank you.

Well, thank you. That does conclude today's conference. We do thank you for your participation. Have a wonderful day.