Five Point Holdings, LLC (NYSE:FPH) Q1 2022 Results Conference Call May 12, 2022 5:00 PM ET
Dan Hedigan - CEO
Leo Kij - Interim CFO
Conference Call Participants
Alan Ratner - Zelman & Associates
Ken Hansen - Stifel
Greetings, and welcome to the Five Point Holding LLC First Quarter 2022 Conference Call. As a reminder, this call is being recorded. Today’s conference may include for statements regarding Five Point 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. Please go ahead, sir.
Thank you. Good afternoon, everyone, and thank you for joining our call. I'm joined here today by Leo Kij, our Interim Chief Financial Officer; Mike Alvarado, our Chief Legal Officer; Greg McWilliams, our Chief Policy Officer; And Stuart Miller, our Executive Chairman. I'm very pleased to update you today on the progress of the company for the first quarter of 2022.
I'll also review some of the changes that have taken place during the quarter and update you on steps we've taken toward implementing our strategy going forward. Then Leo will give an overview of the company's financial performance and condition. We will then open the line for questions to our management team.
Let me start by saying that, while rising interest rates and inflation have dominated business news cycle, and have put an affect to the broader equity and debt markets, California land and housing markets have not lost their strength.
The general shortage of housing supply remains a dominant theme. On demand remains strong, driven by higher wages and record low unemployment in spite of higher interest rates. Against that backdrop, the first quarter represented a pivotal shift in evolution of the company, reported a $36.8 million loss for the quarter. We have met at several major that will better position Five Point for the future.
As noted in our earnings release, we recognized approximately $20 million in restructuring expenses as we began the process of better managing our costs and creating greater efficiencies in our day-to-day operations. At the same time, we're pursuing opportunities to increase revenue in our core land sale business, allow us to fortify our balance sheet. Having entered my first full quarter as CEO of Five Point, I'm confident in our path forward and associates who are executing on our strategies. Five Point has a very solid balance sheet.
We're looking to strengthen our position as run an ever more efficient business. As we move forward, we're increasing our focus on cost management and increasing cash flow, creating the potential to opportunistically pay down debt to further enhance our balance sheet. We opened Five Point communities at the Great Park in Valencia, continue to show strength in the current economic environment. Business in general remains robust and demand is greater than supply.
During the first quarter, builders in our Great Park community sold 94 homes. During this quarter, the inventory of homes for sale and our only open neighborhood rise was very limited. Rises nearly sold out with only about 50 homes remaining to be released by builders at quarter end. Our new neighborhood called "Solis Park", of approximately 850 homes and will start pre-sales this quarter.
We'll have model open homes only for sale this summer. This opened will greatly expand available homes for sale at Great Park. In Valencia, new home sales by builders sold of 211 homes during the first quarter, bringing the total of 557 homes sold from our opening in May of 2021 through March of 2022. The sales activity occurred as initial 15 neighborhoods opened for sale at different times, with three more neighborhoods opening in the current quarter, we'll have 18 active neighborhoods selling in Valencia.
In San Francisco, we're continuing to focus on reassessing development plan and approval processes, making sure to rationalize costs with yield. I am pleased by the swift action and progress we have made to advance our core strategies. I want to take a moment to update you on those priorities and where we stand up. Optimization and rationalization of our cost structure was our primary focus this quarter.
During the pandemic, Five Point did not adjust its workforce for retained everyone's employment as part of a people first culture. As we have now moved beyond the pandemic, we started a comprehensive top down reviewed the organization, and we took the first steps and right sizing our business by effecting reduction in force involving 31 associates with an additional 15 associates electing to leave the company. Since the end of 2021, we have seen a total headcount reduction of approximately 29% of the workforce. We're continuing to focus on overall operating process refinement.
We also look for revenue enhancement opportunities and overall cost management. I'm personally working with all department leaders and many of their direct reports throughout the company on a regular basis in order to determine, among other things, how best to deploy our human capital. These discussions have led me to complete an internal reorganization that refocused our operational teams around our three communities with an operational philosophy of empowering the teams and holding them accountable with measurable goals. We continue to strive to accomplish more with less.
As our team moves forward from here, we continue to look for opportunities to create operating efficiencies across the company. The focus on accountability we're looking to drive bottom line performance, drive cash flow, and fortify our balance sheet while building shareholder value. Our second priority this quarter has been to continue our work on the development plans for the 23 million square feet of planned commercial opportunities in our three communities. With an active focus at the Great Park and Valentia, we have assembled a team of experts in all of the various commercial property disciplines that initiated a comprehensive review of the commercial opportunities in today's market.
This review includes expanding our residential programs to include multifamily for rent opportunities. With our investments in infrastructure and amenities in place and the strong market fundamentals and certain commercial assets, we are seeing increased interest for our commercial landholdings. Our mixed-use zoning allows for a multitude of uses, and we believe there are opportunities to rethink conventional approaches to work and retail spaces as we move forward from the prior two years of pandemic, and to introduce creative solutions within the evolving commercial market. As an example, just yesterday, we had a comprehensive meeting with our partners at the Great Park to review progress on our commercial properties execution.
This review delighted numerous opportunities to reconsider prior plans and drive increased revenue opportunities for the very near future. Anticipate that this will drive greater cash flows in 2023 for the Great Park Venture, and each thereafter, which will result in greater distributions to Five Point. As a third priority, we have also focused on opportunities to enhance entitlements at our communities to address California's current housing shortage. Our communities present a unique opportunity to fill some of the void of a housing shortage that has been acknowledged as a crisis by the governor.
These units could be for sale or for rent, and we are committed to continuing to work with our public partners and community leaders to help address the current shortage, which drives the workforce housing crisis. As we have commented before. Five Point is committed to being a leader in building sustainable, mixed-use communities in California. Our certified program to deliver a net zero greenhouse gas unit in Valencia, especially given its size and scale, has set the bar high in the state, as evidenced by our strong home sales pace.
We believe new homeowners are embracing a bunch of community that intentionally preserves natural resources and maximizes energy efficiency. Over time, working for our local jurisdictions expect to enhance and expand our leadership in sustainable community development. As I've said before, it's a priority to move the development of our San Francisco properties forward. I've been fully engaged, our operational team in San Francisco.
We will continue to work in conjunction with our public partners there to get this project back on track. In summary, our first quarter has been a steppingstone quarter for Five Point. We have focused on rightsizing our overhead and rationalizing our cost structure, enhancing our residential offerings. At the same time, looking to seize upon our commercial opportunities and enhance our commercial revenue.
I remain optimistic about both the short and long-term future of the company, but the realization that we are in a dynamic market and we need to always remain proactive and focused on overall economic conditions. In particular, we are monitor the impact of rising interest rates and inflation and buyer demand and housing. I expect that these factors may impact the housing market nationally. We're continuing to see strong demand in our markets and still anticipate fourth quarter 2022 sales to builders of approximately 350 home sites at Valencia and 850 home sites at the Great Park.
All of which will further our cash flow, fortify our balance sheet, and drive long-term shareholder value. Now, let me turn over to Leo who will report on our financial results.
Thank you, Dan. A summary of our financial results was included in the earnings release issued earlier today and our first quarter 10-Q has been filed with the SEC, and is available for review on our website. The consolidated results for the first quarter are as follows: Our net loss for the quarter was $36.8 million, which includes $16.8 million and selling, general, and administrative expenses. $1 million in losses from our unconsolidated entities, and a $19.4 million restructuring charge comprised of $18.5 million related to executive management restructuring activities and 900,000 related to estimated severance benefits.
The executive management restructuring activities included the appointment of Dan Hedigan as our chief executive officer on February 9th, and Lynn Jochim's subsequent transition from president and chief operating officer to an advisory role pursuant to a three-year advisory agreement. This resulted in a change to the management structure that was put into place in the fourth quarter of last year, when Emile Haddad transitioned from his role as chairman, chief executive officer, and president to senior advisor, and then Jochim was appointed as president.
Our advisory agreements with Emile and Lynn remain in place through each respective term. After considering these changes and the applicable accounting guidance, we accrued a related party liability of approximately $15.5 million attributed to future retainer payments that we will make to Emile and Lynn.
We also recognize $3 million and an additional restructuring costs associated with our unvested restricted share awards that became -- that will -- that become unrestricted upon vesting dates in January 2023 and 2024. In addition to our executive management restructuring activities and as Dan mentioned, we previously -- we have seen an approximately 29% reduction in headcount since the end of 2021. Most of the reductions were the result of a companywide layoff that occurred at the end of the first quarter. At March 31st, we accrued 900,000 and restructuring costs for estimated severance benefits from these layoffs.
While there were no land sale closings during the quarter, we continue to invest in inventory, which increased by $47.9 million, and was primarily related to land development activities in Valencia. Our cash balance at the end of the quarter was $204 million and we had no outstanding borrowings under our $125 million unsecured revolving line of credit. Our debt to total capitalization ratio was stable at 25.1%, and our net debt to capitalization ratio, when taking into account our cash balance was 18.4%. Moving to segment results for the first quarter.
The company has four reporting segments: Valencia, San Francisco, Great Park, and Commercial. Segment results for the first quarter are as follows: The Valencia segment is consolidated for accounting purposes; the segment loss was $4.8 million for the quarter; There were no landfill closings in Valencia during the quarter and selling, general, and administrative costs were comprised of selling and marketing expenses in support of our first development area, as well as general and administrative costs incurred to support the segment's operations as we work toward closing anticipated fourth quarter builder land sale.
The San Francisco segment is consolidated for accounting purposes and recognized a $700,000 loss for the quarter. This loss is comprised of general and administrative costs incurred to support the segment's operations, as they focus on reassessing the development plan and approval process for our San Francisco assets; Next, the Great Park segment reports the operations of the Great Park Venture, which is the owner of the Great Park neighborhoods, as well as management services provided to the venture by Five Point Management Company. We own 37.5% of the percent interest of the venture, and 100% of the management company.
Although the Great Park segment reports the full results of the Great Park venture, our investment in the venture is accounted for under the equity method of accounting. And therefore, the assets, liabilities, results of operations, and cash flows of the venture are not consolidated within our financial statements. The Great Park Venture is a self-funding operation with no debt and had a cash balance of $127 million at the end of the quarter; Great Park segment revenues were $22.4 million, which primarily consisted of $17.2 million related to the closing of nine homes under the Great Park Ventures fee build program, and management fee revenues of $3.4 million recognized by the management company for services provided to the venture. There were no landfill closings at the Great Park in the first quarter.
The profit recognized by the fee billed home sales of $4.3 million was more than offset by the venture selling, general, and administrative expenses of $7.6 million, which were mostly comprised of selling and marketing costs incurred in support of home sales at the venture, including a next neighborhood plan to open for sale this summer, Solis Park. The remainder of the expenses related to general and administrative costs incurred to support the ventures operations, as we work toward closing anticipated fourth quarter builder land sales.
Overall, the Great Park segment had a net loss of $2.1 million for the quarter, which is comprised of approximately $700,000 and income from the management company and a $2.8 million loss from the Ventures operations. The company's equity and loss from the Great Park Venture after adjusting for a -- difference in investment basis for the $1.3 million.
Our commercial segment reports the operations of the Gateway Commercial Venture and management services provided by Five Point Management Company of venture. We own 75% of the Gateway Commercial Venture and 100% of the management company. Our investment in the venture is accounted for, 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 statement. Commercial segment income was $215,000 for the quarter, which included $103,000 for the management company and $112,000 from the operations of the Gateway Commercial Venture.
Five Point's equity and earnings from the Gateway Commercial Venture was $84,000. With that, I'll turn it over to the operator for questions.
[Operator Instructions] We take our first question from Alan Ratner with Zelman and Associates.
Dan, I guess first question on -- all the action you guys took, I guess, toward the end of the quarter there -- on the restructuring efforts.
I know that's -- certainly not -- not fun, but I guess just thinking through the go forward impact there, do you guys have an estimate just in terms of potential cost savings? I know your SG&A rates been running at about $20 million a quarter over the last couple of years. So any estimate where that might go given these actions you guys took?
I think Leo can answer -- Leo can answer that question if you're looking at that portion, won't you?
Yes. We're -- we would look at a reduction in our -- the cash payroll cost annualized to the company of approximately $9 million.
Perfect. And assuming all of that would be -- would have been flowing through the SG&A line before?
Alan, you're right. Alan, that wasn't -- it wasn't fun. But it was very strategic and we think important for the company.
Sure. I think it certainly makes -- make sense given the environment and the go forward look here. So, Dan, I know you mentioned, as far as home sales activity is concerned that you hadn't really seen any impact from the move in rates and all the stock market volatility. I'm guessing -- that those comments were kind of through the quarter.
It seems like the last couple of weeks maybe there's been another level of volatility that's kicked in. And maybe some -- chatter that things maybe have turned a little bit more in the housing market in terms of traffic starting to wane and maybe just overall buyer fatigue here. So can you just clarify what timeline you're referring to in those comments and whether or not you have seen any shifts, either from the home buyer side or from the homebuilder side as far as maybe becoming a bit more conservative here over the last two or three weeks.
Well, I would say that we have not seen a slowdown in our sales base. Now, Valencia, which has a lot of programs, we're seeing consistent sales there. Obviously at Great Park, we were down there some just the very end of the inventory and builders are slowly letting it out as they wait for the new communities to open up. We haven't seen anything there.
We actually are in contact, obviously, with the builders because of another offering going out. And everyone still is very enthusiastic about buying land. So we're not seeing it. Once again, we do know that it's important to keep heads up.
But right now, it's all right now we're not seeing it.
That's that's great to hear. If I can sneak in just a third question here. Dan, one of the things you mentioned that you're looking at or potentially trying to do here is actually pay down debt.
And I was a little surprised at that, only because just knowing where you guys are as a company in your life cycle, I would assume that at some point here you would hope to get San Francisco up and running off the ground, which is likely going to require some cash investment, at least upfront. You mentioned some commercial projects and assets, and I'm not sure whether that would be done more joint venture or off-balance sheet. But can you just talk through a little bit how you see the cash flow trending over the next, call it, 2 to 3 years because we've been under an impression that as San Francisco ramps up whenever that might happen, that you might be looking at -- another year or two of pretty decent cash outflows. But it sounds like you're assuming maybe the opposite?
Well, in San Francisco, I'm -- once again, I'm still getting in my head a lot around San Francisco. So -- that's not really in play at this moment. So it's not something that, that we're looking at current cash flows. We need to, really finalize, really the process and what we're doing up there.
Otherwise, we're going to be very proactive in managing our cash. So when I really say that, it's because we're going to be watching our cash very carefully and how we spend it. And I think that, that hopefully supports all of our efforts that we're trying to achieve going forward.
[Operator Instructions] We take our next question from Ken Hansen with Stifel.
For full disclosure, I'll run my a chartered financial analyst at Stifel. I'm not representing the firm in this discussion, I'm actually a shareholder.
My 60,000 shares were bought about a year -- two years ago now. And during that time period, of course, I have had now three people leading this discussion. You're the latest, Dan. And I'm hoping it's a harbinger of good things to come.
But what I wanted to know is I missed something in my analysis the first time around in my initial purchase. And I'm wondering from what you're seeing, what -- was the mistake on my part? Is it that the capital structure is too complex? The legacy holders and needs to be paid out? Rate of sales is too slow; costs are too high? What happened in the last two years that made Five Point not look like the builders and the builders success over that same time period?
We have -- we have great assets, again. So I can tell you that I've spent a bunch of time on all of them in the last 90 days. And -- but it's going to take time. And I think the the issue here is, is we need we need time to execute on all of them, but they're great assets.
So that's -- I'm not quite sure how you can say any more information about your initial underwriting, but love the assets.
Yes. And I guess that's what's -- a bit puzzling is that the underlying assets, I would agree, are world-class and so, something has happened between the acquisition of these world-class assets and now that hasn't benefited the common shareholder. And this is the first time I think I've heard anybody say to build shareholder value. Prior to that, I think the people first culture may have lent itself to orientation around other things, but I'm glad to hear that the shareholder value is of importance.
But I'm just wondering why these world-class assets so far haven't filter down to any appreciable consideration to the common shareholders?
Well. You may be off asking really the market, which I can't speak to the market. But California assets really take time to achieve their value. California has a long -- it's a long game in the state.
And with the -- you talked about the enhanced residential opportunities that Creek Park, that was mentioned, I think, in a previous call. Where are you on that and what's the probability of success in doing that? And what do you think the eventual result will be?
Well. That is actually a work in progress in the work that we're studying. I'm not sure if you're in California or not, but there is a very active program in California called RHNA, the Regional Housing Needs Assessment, and that gives us opportunities. It's a Great Park for additional residential, but that is a -- that's a deep study we're into right now.
So I really couldn't give you a answer, but yet -- but that's what drives it all, really, the RHNA process in California.
And one last question. The -- your appointment, obviously, was meant to do a certain thing in the direction of the company. I'm just wondering from your perspective, what's the skill set that you're bringing to the team that's maybe different than the others or oriented differently? Or can make shareholders like me more confident that we're on the right track?
I think, Ken, I bring 32 years of experience in the neighboring community of the Irvine ranch. And I have deep, deep experience in residential development, residential land sales, and have also worked closely with teams of people on the commercial side in my past life. So what I'm just -- there was a huge lift to get this rolling. And I'm really just now here to continue on a path of really executing and taking all those years of experience.
One last comment is, is there any way, this is brought up in the meeting or one of these conference calls a couple of times back, is there any way that is CFO can help investors appreciate the true value of the underlying assets that you do hold? If I'm a resident of Irvine, my office looks down on your property at Great Park. I'm in the Black Bear Building. So I see that asset. But I don't think other people can appreciate what that represents. And maybe it's because it's -- there are too many parties involved and they can't get a handle on -- what the dollar amount would mean if completely developed and built out that in addition to other priorities. So is there any way the CFO can come up with a net asset value that says, given what we know about the opportunities here, this is the range of valuations that we see.
Ken, that's not something we're prepared or in position to do.
[Operator Instructions] It appears there are no further questions at this time. I'd like to turn the call back to you for any additional or closing remarks.
Thanks, everyone for joining us today. So long.
Thank you. That concludes today’s call. Thank you for your participation. You may now disconnect.