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spk00: Greetings and welcome to the Five Point Holdings LLC fourth quarter and year-end 2023 conference call. As a reminder, this call is being recorded. Today's call may include forward-looking statements regarding Five Point's business, financial condition, operations, cash flow, strategy, and prospects. Forward-looking statements represent Five Point's estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could affect future results and may cause Five 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 the Five Points 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 Huttigan, Chief Executive Officer. Please go ahead.
spk04: Thank you. Good afternoon, and thank you for joining our call. I'm going to start off by telling you that I have picked up the cold that seems to be going around to a lot of people, so if I don't sound like myself, that's the reason. I have with me today Kim Tobler, our Chief Financial Officer, Mike Alvarado, our Chief Legal Officer, and Leo Key, our Senior Vice President of Finance and Reporting. Stuart Miller, our Executive Chairman, is joining us remotely. In my remarks, I'll update you on our Q4 and year-end results, on our team's focus during the quarter and on the steps we are taking to implement our strategic priorities. Next, Kim will give an overview of the company's financial performance and condition. We'll then open the line for questions to our management team. So let's begin. First, let me congratulate our team on a very strong quarter and year. We started the year, but we're still somewhat uncertain about the market and reluctant to make commitments to acquire additional home sites. And we finished the year with capital markets making it more difficult for commercial developers to pursue new speculative development projects. Yet, despite those headwinds, we ended the year strongly with consolidated net income of $58.7 million in the fourth quarter, resulting in a net income for the year of $113.7 million. We're able to accomplish these results by continuing to focus on our three main priorities, generating revenue and positive cash flow, controlling SG&A costs, and probably most importantly this past year, managing capital spend to match near-term revenue opportunities. Second, I'd like to take a moment to note that this is the most consolidated net income that FivePoint has generated in a single year since its formation. It also ended the year with $353.8 million in cash and $0 drawn on a $125 million revolver for total liquidity of $478.8 million. In addition to executing on our operating priorities, we also initiated an exchange offer for our 625 million 7.875% senior notes due November 2025 for new 10.5% initial rate senior notes due January of 2028. I'm happy to announce that on Tuesday of this week, we successfully settled with a participation rate over 99%. As part of the exchange, we reduced our outstanding debt by $100 million, and which will reduce our cash balance, which will be reflected in our first quarter release. This exchange strengthens our balance sheet and provides us additional time to monetize our land development investments and to prepare the company for growth. Kim will cover more details regarding this exchange during his comments. Since I arrived at Five Points, we've been working on a number of initiatives underlying our three main operating priorities. In particular, we have focused on our governmental relationships, assisting local agencies to deliver badly needed housing in these supply-constrained markets in a manner that maintains the attractiveness of our communities to today's consumer and with product offerings at several different pricing levels. We have reengaged with the builders, drawing on my deep relationships with them in order to drive higher land residuals by allowing them to design and build more efficient housing products. You've heard me speak to this in the past, and we have seen this come to fruition in our more recent land sales. Finally, we spent considerable time at the end of 2022 and beginning of 2023 analyzing the different commercial uses that could be developed on our commercial land holdings at a time when residential was lagging, allowing us to pursue industrial land sale transactions that were able to close in Q4 despite the challenges that most commercial markets felt in the second half of 2023. The work we have done and continue to do regarding our commercial land will allow us to be able to toggle back and forth between residential and commercial land sales as current market conditions dictate. Our focus on these initiatives allowed us to have a strong year, notwithstanding the changing economic climate we experienced in 2023. We intend to stay the course in 2024 Building on the successes we have achieved to date, to that end, while we do not expect to have the same record-breaking earnings in 2024 that we had in 23, we do expect to be cash flow positive and generate substantial earnings, which will strengthen our balance sheet and prepare the company for the future. Let's now move to a market update. The macroeconomic environment for most of 2023 was challenging for new home sales, the dominant theme being the impact of higher interest rates on the home buyer. was a year when home affordability was tested and demand was constrained by the ability of the home buyer to purchase. In that environment, home builders assisted in stabilizing demand by offering mortgage products with reduced interest rates that allowed new home sales to continue even as the resale market slowed. At the end of the third quarter, the market was expecting rates to stay at elevated levels for longer than originally anticipated. However, as we end at the fourth quarter, the Fed signaled that we might be closer to the end of the tightening cycle and we might see lower rates in 2024. Hearing sales reports from builders support improvement in new home sales as interest rates moderated and homebuyers had more confidence in moving forward with a new home purchase. This has led to improvement in home builder confidence, which we expect will translate into greater builder demand for residential land in our communities. California's housing dynamics are still very favorable to new home sales. The housing shortage is a driving force with production constrained by availability of land, labor, and materials. Owned and rental occupancies remain extremely tight, clearly signaling that more homes are needed. Against this backdrop, we feel good about our position in the California market with entitled and irreplaceable land at Great Park in Irvine, Valencia in North Los Angeles County, and a candlestick in Hunters Point in San Francisco. and we still have strong interest from home builders for pipeline in these key California markets. On the commercial side of our business, capital markets have slowed prospective commercial development, but we are still seeing interest from the user market as users have limited options if they want to design, own, and control their own facilities on a long-term basis. We expect this user interest will continue to support demand in this preferred asset class. We also believe that the regional housing needs assessment or some of you may know it as RENA, process that is ongoing in California will give us an opportunity to add more entitled housing units, thereby creating options to consider multifamily or for-sale housing on our remaining commercial sites, with the most likely outcome being a combination of commercial and residential uses on these sites. We're actively studying these options to be sure we are maximizing both land value and shareholder value. Let me pivot now and provide you with some updates on our communities, starting first with the Great Park neighborhoods. During the fourth quarter, builders in our Great Park community sold 76 homes. That number, which is low by comparison to more recent quarters, was driven by very limited inventory at Solis Park, our only actively selling neighborhood in Great Park. Despite the limited inventory, we're encouraged by the substantial interest in trafficking in the community, affirming the ongoing appeal of our homes to prospective buyers. We believe the builders share our sentiment as we are actively engaged with multiple builders on new land sale opportunities at the Great Park. Our next major neighborhood, Luna Park, will debut with 798 homes across 13 collections as projected open to phases from March through December this year. In the first half of the year in Great Park, we anticipate closing two land sales totaling 187 home sites and approximately 24 acres. As I mentioned earlier, there remains strong homebuilder interest in acquiring home sites at Great Park, and we anticipate putting additional home sites out to market during the year, which could close either this year or next. Moving to our commercial land, during the fourth quarter we closed on two commercial land sales, totaling approximately 38 acres of land for an aggregate purchase price of $174.2 million. This was the balance of the 80 acres we had taken to market to initiate our commercial land sales program at Great Park. They initially entered into these land sale agreements early in 2023 before the capital market started adjusting throughout the year. While speculative developers avoided closing on new land acquisitions, if many, if not most markets were able to close these transactions. The ultimate closing price reflected the increased borrowing costs and higher financial returns that institutional developers expect on spec development projects in this market, but are still strong for acre values by even recent historic measures. As we move forward into 2024, we'll look to bring additional commercial land to the market, focusing on users, while using our flexible zoning to evaluate the opportunity for commercial and or residential land uses on these sites, depending on which provides the highest land value. While there has been a reduction in specter building in relevant Southern California markets, which has slowed the pace and pricing of offers for commercial land, our location in the heart of Orange County has supported continued interest in our commercial land for various uses, and we do not anticipate that changing in 2024. Now, moving to Valencia, our other active community. During the fourth quarter, builders sold 31 new homes. As of year end, 1,202 homes from our initial offering of 1,268 homes have been sold with only 66 homes remaining, which is 5% of that initial offering. In our newest Valencia development area, we now have three new neighborhoods open with four more still to be opened. 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 an increased pace of sales. Builders remain engaged with us in Valencia. During the fourth quarter, we sold 583 home sites dispersed across six programs in approximately 46 cumulative acres for $101.8 million. In furtherance of our priority to minimize capital spend with With this land sale, we shifted some of the final horizontal development costs to the builder, so the final consideration payable to us reflects the fact that the builder would take on these development costs. As we move forward with monetizing our eventual land holdings, we're well positioned to expand on our capital management strategy, both by tying our capital expenditures in near-term revenue events and by structuring land sales with our home builder partners to, where practical, shift land improvement costs to the builders. We also continue to market a prime 35-acre mixed-use site in the community. While we are still marketing for commercial uses, with adjustments to the commercial market driven by changes in interest rates and expected financial returns for developers, we're also studying residential options for the site with our home building partners. We expect to have more to report on this later in the year. Turning to our communities in San Francisco, With the passage of state legislation that allows for the extension of the existing tax increment financing program for Candlestick and Hunters Point Shipyard, we're now focusing our attention on working with the city and county of San Francisco to progress the rebalancing of the underlying entitlements. Recall that one of the main priorities of the rebalancing is to establish Candlestick as a standalone project, separate from, but complementary to, the ultimate development of the shipyard site, which will be developed once the Navy has completed its remediation activities. While timing to commence development of Candlestick is dependent on completing processing of approvals through various city and county agencies, with the state's legislation benefiting the public financing program, we believe that we are building momentum to move forward with the standalone development of Candlestick. Candlestick will be the first phase of this larger mixed-use community located on irreplaceable land along the San Francisco Bay. In closing, 2023 was a year of both progress and redirection for FivePoint, starting with great uncertainty in January around the direction of interest rates and finishing with a positive view around interest rates and economic growth. Against this backdrop in 2023, we had a record year of earnings despite the market volatility. FivePoint has positive momentum and we remain optimistic about our communities and our future. As we look ahead to 2024, Opportunities remain strong as we build on successes in our core strategies. As I noted earlier, we are positive about our liquidity and balance sheet. We are well positioned to harvest opportunities that present themselves in this ever-changing environment. The underlying housing environment reflects a chronic supply shortage, as well as a growing pent-up demand for housing that has been held back by materially higher interest rates. As I noted last quarter, land development is a long game, and we have continuously been improving our financial condition With each passing quarter, we're better positioned to bring our unique land offerings to market. They're 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 with that long game, while recognizing the importance of focusing on creating and maintaining shareholder value. Now let me turn it over to Kim, who will report on our financial results and provide some limited guidance for next year.
spk03: Thank you, Dan. A summary of our financial results was included in the earnings release issued earlier today. And as Dan mentioned, we reported consolidated net income of $58.7 million for the quarter and $113.7 million for the year. Since the guidance we gave for the second half of the year was $50 to $70 million, I wanted to note that we are reporting $72.9 million in consolidated net income for the second half of the year, slightly higher than we had anticipated and that contributed to our record full year earnings for the company. I'm now going to review the sources of revenue, our SG&A and other costs, the impacts of our equity and earnings for our unconsolidated entities, our development spend, our recent senior note exchange, and liquidity for the quarter and for the full year. In the course of the discussion, I will give some high level guidance and we'll finish with an outlook for 2024. First, revenue. In Q4, we recognized $100.1 million in land sales revenue, which was primarily generated by the $101.8 million sale of 46 acres of land entitled for 583 home sites to a single home builder at our Valencia community. We recognized a 34.7% gross margin on that sale. For the full year, we recognized $161.4 million in land sales revenue which was primarily generated by the sale of 72 acres of land entitled for 729 home sites to three different home builders at our Valencia community. In addition, we recognized $18.1 million of management services revenue for the quarter, which was comprised of $3.1 million in base fee payments and $15 million in incentive compensation revenue. and for the year, $47.6 million, which was comprised of $12.4 million in base fee payments and $35.2 million in incentive compensation revenue. The Great Park Venture made an incentive compensation payment to Five Point during the quarter of $19.5 million, and for the full year, Five Point received incentive compensation payments of $41.6 million. Our selling general administrative expenses remain stable throughout the year. SG&A was $13.1 million for the quarter and $51.5 million for the year. We generally expect to stay in that range in the coming year. The cost of management services for the quarter was $7.8 million, which included $5.8 million of intangible amortization expense. For the year, it was $22.2 million and included $15 million of intangible amortization expense. We also reported $1.8 million of other expense during the quarter associated with third-party costs incurred for our senior note exchange transaction. I will discuss the exchange more in a moment. However, I want to note here that the exchange will be accounted for as a modification of our existing debt as opposed to an extinguishment. Therefore, third-party transaction costs will be expensed as incurred in the fourth quarter of 2023 and in the first quarter of 2024. We estimate additional third-party transaction costs of approximately $6 million will be incurred in the first quarter. Now let me turn to the contributions from our unconsolidated investments. Equity and earnings from our unconsolidated entities for the quarter was $24 million, which included our 37.5% share of the Great Park Ventures quarterly net income of $81.1 million, or $30.4 million for us, partly offset by a basis difference amortization of $4.5 million, and our share of a net loss from the Gateway Venture of $1.9 million. For the year, we recognized equity in earnings of $76.6 million, which included our 37.5% share of the Great Park Ventures annual net income of $250.6 million, or $94 million for Five Point, partially offset by basis difference amortization of $15 million, and our share of a net loss from the Great Gateway Venture of $2.9 million. Given its significance to our performance, I'd like to give a little more detail about the Great Park Venture's contribution to our earnings this quarter and this year. During the fourth quarter, the venture closed the sale of two commercial land parcels to two separate developers, totaling approximately 38 acres for a combined sales price of $174.2 million, or $4.6 million per acre on a blended basis for both sales. The venture recognized a 59.7% gross margin on those sales. Additionally, the venture recognized $7.5 million of profit participation revenue during the fourth quarter. For the full year, the venture recognized a total of $532 million of sales revenue from residential and commercial land sales and $21 million of profit participation revenue. In the fourth quarter, the Great Park Venture made an equity distribution to Five Point for $72.4 million. For the full year, Five Point received equity distributions totaling $154.2 million. At year end, the venture had a cash balance of $61 million. Now let's turn to our development spend at our two active projects. At Valencia during the quarter, We added $13.5 million of development costs and $5.2 million of capitalized interest to inventory, offset by $1.2 million of CFD reimbursements for a net addition of $17.4 million before cost of sales inventory relief. For the year, Valencia added $76.5 million of development costs and $20.9 million of capitalized interest to inventory, offset by $44.5 million of recoveries and $18.9 million of CFD reimbursements for a net addition of $34 million before cost of sales inventory relief. For 2024, we are expecting a little higher development spend and a little more than half of the CFD reimbursements we received in 2023. Now let me turn to the Great Park Venture. During the quarter, the Great Park Venture added $20.6 million of development costs and $11.1 million of capitalized interest to inventory, offset by $6.8 million of CFD reimbursements for a net addition of $24.9 million before cost of sales inventory relief. For the year, the venture added $86.3 million of development costs and $23.3 million of capitalized interest to inventory offset by $89.9 million of CFD reimbursements for a net addition of $19.8 million before cost of sales inventory relief. For 2024, we are expecting the development spend to exceed $100 million with approximately a third less CFD reimbursements than what was received in 2023. Now let me discuss the senior note exchange. As Dan mentioned, this Tuesday we successfully settled our senior note exchange, which helped us to proactively address our senior notes that were slated to mature in November of 2025. We would like to thank our bondholders for continuing to have confidence in the company and electing to extend their relationship with us through January, 2028. 99.76% of our bondholders elected to participate in the exchange, which provided for a $100 million cash payment and $523.5 million of new 10.5% initial rate senior notes with the following terms. We will be paying a coupon of 10.5% from the settlement date through November 15, 2025. Then the coupon will move to 11% until November 15 of 2026. And finally, the coupon of 12% until the notes mature on January 15, 2028. The new notes have a call premium schedule of 104 through November 15, 2024, then 102 through November 15, 2025, and 100 thereafter through the maturity A copy of the indenture for the new notes was on the 8K we filed on Tuesday. There are still $1.5 million of the old seven and seven eighths senior notes outstanding that will mature on November 15th, 2025. For the first two years, our interest payments will be approximately $6 million more a year than what we've paid historically. Now let me turn to our liquidity. I'd like to emphasize Dan's earlier comments about our liquidity. At year end, we had cash and cash equivalents of $353.8 million and $125 million of available borrowing capacity under our evolving credit facility, giving us total liquidity of $478.8 million. Our debt to total capitalization was 24%. Following the close of the exchange, we still have significant liquidity and our debt-to-total capitalization ratio has dropped to approximately 21%. We have adequate liquidity to thoughtfully continue the development of our three projects and prepare FivePoint for growth. Now let me conclude. I'd like to give some limited guidance relative to 2024. We remain committed to our three priorities, that is, generating revenue and positive cash flow, controlling SG&A costs, and managing capital spend to match near-term revenue opportunities. For the full year 2024, we currently expect to generate earnings and positive cash flow from what we can see right now. If the two sales that Dan described occur in the first quarter, it should put us on that path after adjusting for all of the exchange-related payments. After the first quarter, we will be able to give further guidance as to how we expect the year to develop. We are actively managing everything we can control and are not letting the business run us. With that, I'll turn the call back to Camilla and look forward to your questions.
spk00: Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation cell will indicate that your line is in the question queue. And you may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start key. One moment, please, while we pull for questions. Thank you. Our first question will come from the line of Alan Ratner with Selman and Associates. Please proceed with your question.
spk05: Hey, guys. Good afternoon. Congrats on all of the progress you made this year. It was a busy one for you guys, but certainly entering 24. much stronger financial shape than 23 so congrats on all the great work there um first dan you ran through a lot of detail which i appreciate can you just reiterate what i think you mentioned there's two sales expected i think in the first quarter can you can you just repeat what the those sales expected are um was it the 35 acres in valencia that you were referring to so the two sales in the first quarter alan first of all how you doing alan actually uh
spk04: It's good to hear from you, but those first two sales are in the Great Park. It's 187 home sites and approximately 24 acres.
spk05: Got it, okay. So you're referring to the cash flow and the profitability is specific to that transaction occurring?
spk01: Yes.
spk05: This is the guidance. Got it. Yes. Second question, I don't know if you'll be able to help us with this, but there's been a lot of moving pieces, especially in Valencia and Great Park over the last year or two with land transactions and maybe some rezoning or thoughts of rezoning. Is it possible to provide a snapshot of where you sit in both of those projects today in terms of kind of lots still yet to be sold, both in the residential and the commercial arenas?
spk04: And Alan, let me ask you to kind of repeat that. You're saying in Valencia, in which areas are you focused on in Valencia? A mission village?
spk05: I'm just referring to the, no, the project as a whole, you know, just in terms of a current lot count that you, obviously Valencia is still much earlier on, but just trying to figure out kind of what the one way is ahead of us for both of those projects.
spk04: So there's the overall Valencia, and I think we're currently saying there's about 17,000 lots left in Valencia.
spk03: Alan, what I would tell you, what's ready and available, there's about 131 acres at Mission Village that's still available for sale. When you get past that, we're still land planning those other things, and so I would defer that to a future discussion. Everybody's anxious to get that information. I'm getting a lot of requests for that, and so internally we're trying to figure out the best way to do it. But right now, what's available in the near term is 131 acres in Mission Village.
spk05: Okay, that's helpful. And that does not include the commercial site that you referenced earlier?
spk03: No, that would include. That's in its entirety. That includes that 34 acres. Got it.
spk05: Okay.
spk03: And again, that could... And that could become residential or it could stay commercial. We're trying to figure out what's the best value per acre we can get.
spk05: Got it. Okay. That's really helpful. Thank you. And then do you have a similar number in Great Park just in terms of kind of lots that are on the ground ready to go? I know you mentioned the first quarter sales. Is that the entirety of it?
spk04: No. I mean, from a standpoint of Great Park and You know, Great Park has a very specific entitlement for lots, about 10,500, including all the affordable. And I think right now we probably have sold to builders, and obviously they've been sold to homeowners. But I think we're about 2,000, I think, left to go. I think we're about, yeah, I'm doing a math. I think we're probably about 7,000 lots sold. We have 9,500 market rate lots, so we're probably right around 7,000 lots sold. But I think the thing that we need to understand about Great Park is that we really do have flexible zoning on our commercial land. And the city of Irvine is pushing hard in their arena process. So we have, I think we, once again, it's always about what's going to return the most to the land. And so we do have, you know, you know, a real opportunity for having additional residential units in the Great Park. But that's something, once again, we're studying. And as we think, you know, you talk about the lots that we're closing in the first quarter. We have other land ready to sell this year that's entitled and ready to go and, you know, mass graded. So, you know, we have a pipeline there. Once again, it's always about really trying to make sure we're maximizing the value as we go through there. But I think that, you know, RENA... We'll be talking about it this year. We're spending a lot of time with the city of Irvine, but I think Reno will give us an opportunity to look at additional residential opportunities there. So that 10,500 number that we've always kind of looked at as our cap, we think there is a true opportunity this year to see that move. But once again, it's all about land value.
spk05: Got it. That's really helpful, guys. I appreciate all the detail and best of luck in the upcoming year. Thanks again.
spk00: Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. One moment, please, while we poll for more questions. Thank you. Our next question comes from the line of Myron Kaplan, who's a private investor. Please proceed with your question.
spk02: Yeah, hi, gentlemen. Thank you for taking my call. Yeah, you've really righted the ship great venture. In the last two years, when the stock was kicked out of the Morgan Stanley Index and then you were subjected to all kinds of viral rumors of imminent bankruptcy. You can put that issue behind you, which is done. You're absolutely shown that you can sail the ship, so you might say ship shape and so forth. I have a question about the exchange offer. You mentioned in the papers, what are the important ways – that the company in which the company is released from what you consider overly restricted covenants, now that you have more freedom.
spk03: Myron, can you just clarify that? I'm just not following what your question is.
spk02: There was some text somewhere in the exchange offer, I believe, that the management felt that the corporation, you were able to be able to, in the new indenture, which is, I guess, the third, that you were able to be released from some overly restrictive covenants.
spk03: No, we weren't released of any overly restrictive covenants. We didn't add any restrictive covenants, and the old notes had a covenant strip. Just to be clear... With the new notes that we did at a covenant that we will not make dividend payments or buy back stock while it's outstanding, we're investing in the company. So that's what we're doing there. But that was the only thing we added other than what was already existing.
spk02: I see. Okay. The other thing I wanted to ask you is, You referred already to the state's drive, California's drive for affordable housing. I believe that there's going to, in the fall, a referendum on the ballot for a $10 billion bond for affordable housing. Does that possibly help you deliver the kind of re-entitled property for such a program?
spk03: What I would tell you, Myron, is anything that the state does to improve the ability to provide low-income housing will ultimately provide some benefit to us in some way. We're having to explore how that will occur. But I wouldn't say that that's going to be a boon. We have already accounted for what it takes for us to do that, and most of that kind of governmental assistance would be on the margins.
spk02: Yes. The one question I had technically is this reimbursement that you get, it's called CRP?
spk03: CFD.
spk02: CFD. Why will the reimbursement go be cut in half this year?
spk03: Only because we have fewer costs that we have available to request at this time.
spk02: I see. Okay, well, all I can say is that... The prospect of shareholder value is way up in the blue given quality of your land, and you seem to absolutely be managing it excellently. Thank you very much.
spk03: Thanks, Myron. Thank you.
spk00: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to CEO Dan Hedigan for closing comments.
spk04: Thank you. On behalf of our management team, we thank you for joining us on today's call, and we look forward to speaking to you next quarter.
spk00: Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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