Five Point Holdings

Greetings, and welcome to the Five Points Order 2023 conference call. As a reminder, this call is being recorded. Today's conference may include forward-looking statements regarding Five Points business, financial condition, operations, cash flow, strategy, and prospects. Forward-looking statements represent Five Points 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 Points' 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 Points' SEC filings, including those in the risk factors section of Five Points' most annual, I'm sorry, most recent annual report on Form 10-K. files with the SEC. Please note that the five-point assumes no obligation to update any forwarding statements. Now, I would like to turn the call over to Dan Hannigan, Chief Executive Officer.

Dan Hannigan Thank you. Good afternoon, everyone, and thank you for joining our call. I have with me today Leo Key, our Interim Chief Financial Officer, Mike Alvarado, our Chief Legal Officer, and Kim Tolber, our Vice President, Treasury and Tax. Stuart Miller, our executive chairman, is joining us remotely. I'm pleased to update you today on the progress of the company through the second quarter of 2023. I'll also update you on our team's focus during the quarter and the steps we're taking to implement our strategic priorities in 2023. Next, Leo will give an overview of the company's financial performance and conditions. We'll then open the line for questions to our management team. So let me begin by telling you we have made considerable progress since I last spoke to you in advancing our business. And to that end, we have continued focusing on controlling our business and executing on our three main priorities, generating revenue and other positive cash events, managing and right-sizing our SG&A, and managing and limiting our capital spend and matching those expenditures as much as possible to revenue events. As a result, We ended the quarter with consolidated net income of $50.6 million, as compared to a net loss of $9.7 million for the first quarter. Our balance sheet reflects $193.2 million of cash on hand, versus $106.6 million at the end of the first quarter, with $0 drawn on our $125 million revolver, giving us a liquidity of $318.2 million today, versus $231.6 million last quarter, and improving our debt-to-cap ratio to 24.7% versus 25.2% last quarter. We also have no principal debt repayment obligations on our senior notes this year or next. These results reflect the team's efforts and focus on our priorities. At the beginning of the year, we provided guidance that for the first half of the year, we expected negative cash flow of $24 to $56 million. In fact, for the first half of the year, we generated a positive cash flow of $61.4 million, fortifying our balance sheet and positioning FivePoint for future success. Along with significant improvement in revenue and cash flow, we've been able to hold our SG&A in check with SG&A of $12.7 million this quarter versus $13.8 million last quarter, and $26.5 million for the first six months of 2023 versus $29.4 million for the first six months of 2022. With respect to managing our capital spend, for the first six months, we spent $46.8 million before recoveries and capitalized interest as compared to our guidance at the beginning of the year of $45 to $55 million and compared to $63.1 million for the first six months of 2022. We are clearly controlling our business. In many ways, our strong financial results are due to a combination of focused management as well as a constructive economic environment. From an economic perspective, the challenges from interest rate increases and the banking crisis from earlier in the year began to dissipate during the second quarter, and the housing market began to stabilize as homebuyers adjusted to and accepted higher interest rates. Interest rate fluctuations have moderated, and we're seeing more measured rate movements that allow the market to adjust in an orderly fashion. On particular note, resale home inventory remains very low, increasing interest in and demand for new homes. While affordability continues to be a challenge, housing continues to be in short supply in our California markets, and there is still demand for well-located homes in master-planned communities. On the commercial land side of our business, We're seeing strong interest in our unique commercial land offerings at the Great Park and Valencia. We continue to have low vacancy rates in the industrial market in our communities, which we expect will continue to drive demand in this preferred asset class, notwithstanding the adjustments that capital markets have made in the commercial market segment. I'll now provide some updates on each of our communities. Builder neighborhoods at the Great Park continue to sell homes with a strong increase in sales in the first half of this year compared to the second half of 2022. During the second quarter, Builders in our Great Park community sold 177 homes. Soles Park, which is the primary community with multiple active offerings, had its first model complex open in July 2022 and currently has only 200 homes remaining to sell out of the original 849 homes. As we discussed last quarter, we're seeing strong homebuilder interest in acquiring home sites at Great Park. On our prior call, I mentioned that we were actively engaged in the process of selling the remaining 81 home sites in the RISE community and 770 home sites in our next community, District 5 South. That transaction closed in May of this year, and the Great Park Venture recognized $357.8 million of revenue. Also in the second quarter, The Great Park Venture received $61 million of CFD proceeds as reimbursement for public improvements the venture had completed or paid for. With this pace of new home sales, we are continuing to see strong builder interest in acquiring new home sites at Great Park. During the quarter, we entered escrow for the sale of another 82 homes program, which we anticipate closing by year end. We're also negotiating the sale of another 104 home sites, with the closing anticipated in early 2024. On top of the ongoing residential opportunities at Great Park, we continue to market and sell our commercial land, including the industrial land offerings that we brought to market in August last year, as well as other commercial-oriented uses. While not the most opportune time to enter the market, our location in the heart of Orange County has supported a strong interest. Our commercial parcels are unique, are a limited resource, and offered to the South Orange County market, something that has not been available for years, large parcels of entitled land with flexible zoning that allows a multitude of uses, including industrial distribution, life sciences, R&D, and office amongst others. To that end, we anticipate closing sales on approximately 40 acres either by the end of this year or early next year. After these residential and commercial sales, the Great Park Venture will have about 295 acres remaining. Depending on pace of sales, would expect to be through remaining inventory at the Great Park in five to eight years. In Valencia, new home sales by builders totaled 79 homes during the second quarter. As of mid-July, 1,100 homes from our initial offering of 1,268 homes have been sold, with only 168 homes remaining. Builders have now opened the models in two of the eight new neighborhoods in the next area of Valencia, which encompasses 598 homes. Like Irvine, builders are again engaged with us in Valencia, and we entered into one new land sale contract during the quarter, anticipate finalizing another, both of which we anticipate will close during the third quarter. We also anticipate signing a third land sale contract that we believe will close by year end. We also continue to market a prime 35-acre commercial site in the community. We expect to have more to report on that later in the year. While we didn't have land sales in Valencia in the first half of the year, and instead of planning for sales to close in the second half of the year, we're still able to execute on some significant reimbursements and recoveries. We recall that we reported a $17.7 million CFD reimbursement in the first quarter. Additionally, in the second quarter, we collected a $44.5 million recovery from a third party arising out of prior work that performed at the project. From a county perspective, these amounts have been offset against our inventory costs, ultimately increase our gross margin for Valencia sales. As you've heard me state in the past, San Francisco remains a priority for Five Point, and we are progressing our efforts to establish Candlestick as a standalone project separate from, but complimentary to the ultimate development of the 100-point shipyard site when it has completed its remediation by the Navy. These efforts include working with the city and county agencies to rebalance the current development entitlements between the two areas. I'm currently working with the city to update the existing tax increment financing timelines to account for the Navy delays at Hunter's Point. We believe that we are building an amendment on resolving these issues, which will allow us to unlock the standalone development of Candlestick as the first phase of this larger mixed-use community located on irreplaceable land along the San Francisco Bay. As we look ahead, We're starting to build confidence and certainty in our expectations for future accomplishments. Although our business is often dependent on government approvals and accomplishments can be pushed from one quarter to another, we're building visibility in the future quarters and years. To that end, we expect in the second half of 2023 to be able to produce an additional $50 to $70 million of net income and generate additional cash flow as well. ending the year with a cash balance of $250 to $300 million. While some of these results can be pushed quarter to quarter or to next year, we're focused on generating revenue, managing SG&A, and managing our capital spend. We have positive momentum and remain optimistic about our future. Land development is a long game, and we are just at the beginning of the game at some of our communities, but they are not making any more land, and there will never be an abundance of entitled land in California. Our efforts today are ensuring we are well positioned for that long game, while recognizing the importance of focusing on creating and maintaining shareholder value. Now let me turn over to Leo, who will report on the financial results.

Thanks, Dan. A summary of our financial results was included in the earnings release issued earlier today, in which we reported consolidated net income of $50.6 million for the quarter. We recognized 21.3 million in revenue that was primarily generated by management services provided by our management company. Selling general and administrative expenses were 12.7 million, which is consistent with the average of 12.9 million that we have reported over the past four quarters. Cost of management services was 9.7 million, which includes 8 million for intangible asset amortization expense at our Great Park segment. Equity and earnings from our unconsolidated entities for the quarter was 52.1 million and primarily results represents our interest and net income generated at the Great Park venture. Turning to the balance sheet and liquidity. Our net decrease in inventory for the quarter was 5.7 million. This includes a decrease for a non-recurring $44.5 million recovery from a third party related to certain project development costs at a Valencia segment and includes an increase for accrued capitalized interest on our senior notes of $12.3 million. Excluding the recovery and capitalized interest, the resulting increase in inventory of $26.5 million was consistent with prior quarter and 13% lower than the prior year increase of 30.6 million. In addition to 700,000 of interest, we paid 2.5 million against our San Francisco segments related party reimbursement obligation during the quarter. Approximately 8.4 million of this reimbursement obligation that was previously expected to be paid in the second quarter has been deferred to 2024. Our related party has a history of receiving maturity date extensions and we expect additional deferrals during the second half of 2023. Total liquidity is $318.2 million at quarter end and is comprised of $193.2 million of cash and cash equivalents and $125 million of available borrowing capacity under our revolving credit facility. No borrowings or letters of credit were outstanding against the revolver as of June 30th. In addition, no principal payments are currently due on our senior notes, nor are any payments currently due on our payable pursuant to our tax receivable agreement. Our debt to total capitalization ratio was stable at 24.7%, and our net debt to capitalization ratio, after taking into account our cash balance was 18.5%. Turning to our statement of operations, the company has four reporting segments, Valencia, San Francisco, Great Park, and Commercial. Segment results are as follows. The Valencia segment recognized a $4.5 million loss for the quarter. As no sales were closed, Most of this loss was comprised of selling general and administrative expenses of 3.4 million related to employee compensation, as well as selling and marketing expenses in support of our active development areas and the pursuit of 2023 land sales. The San Francisco segment recognized a loss of 885,000 for the quarter. This loss is comprised of general and administrative costs incurred to support the segment's continued focus on rebalancing the current entitlement between Candlestick and Hunters Point shipyard sites, as well as working with the city to update the existing tax increment financing timelines. Our Great Park segment reported net income of $179.1 million for the quarter. This was comprised of net income of $168.2 million for the Ventures operations and 10.9 million in net income generated by our management company. The Ventures operations recognized revenue of 360.6 million during the quarter. Most of this revenue is comprised of 357.8 million recognized from the sale of 798 home sites on approximately 84 acres of land adjacent to the Ventures Solis and Rise neighborhoods. The venture's land sale agreement was comprised of a fixed amount paid at closing and a price participation rate to be paid from future home builder sales. Accordingly, the revenue recognized consists of 214.7 million paid at closing plus 143 million for recognition of a contract asset representing the venture's estimate of variable consideration from future price participation payments. The venture recognizes contract revenue upon satisfaction of contract performance obligations and records contract assets when there is a timing difference between recognition of revenue and the variable consideration becoming due. After completing the land sale, the Great Park Venture made aggregate distributions of 25.5 million to holders of legacy interests and $218 million to holders of percentage interest. We received $81.8 million for our 37.5% percent interest. Offsetting these revenues were cost of sales of $165.7 million, SG&A of $1.8 million, and related party management fee expense of $27.4 million. Management fee expense is comprised of $3 million of monthly base fee payments and a $24.4 million increase in accrued incentive compensation, mostly resulting from a change in estimate of aggregate payments probable of being made as the venture makes future distributions. As it relates to the management company, FivePoint recognized $20.7 million in management fee revenues during the quarter. 3 million of which was from monthly base fee payments and a 17.7 million increase in its incentive compensation contract asset, most of which is related to changes in estimated incentive compensation payments expected to be received as future distributions are made from the venture. Offsetting these revenues were expenses of 9.7 million comprised of $1.7 million for the cost of providing management services, primarily the project team compensation, as well as $8 million of our development management agreement intangible asset amortization expense, resulting from incentive compensation revenue recognized in a quarter. Concurrent with the ventures, distributions paid to its holders of legacy and percent interest, we collected $22 million in incentive compensation payments due under our development management agreement. We own 37.5% interest of the Great Park Venture and 100% of the management company. Although the Great Park segment reports the full interest of the Great Park Venture, our investment is reported under equity method of accounting, and therefore the assets, liabilities, result of operations, and cash flows are not consolidated within our financial statements. The company's equity and earnings from the Great Park Venture after adjusting for a basis difference was $52.3 million for the quarter. The Great Park Venture is a self-funding operation with no debt and had a cash balance of $140.9 million at the end of the quarter. Lastly, our commercial segment venture is a self-funding operation and had a cash balance of $5.1 million at the end of the quarter. Like the Great Park Venture, we only own 75% of the Great Park Commercial Venture. Our investment in the venture is reported under the equity method of accounting, and therefore the assets, liabilities, cash flows, and results of operations of the venture are not consolidated within our financial statements. With that, I'll turn it over to the operator for questions.