Five Point Holdings LLC (FPH) 2017 Q4 法說會逐字稿

Greetings and welcome to the Five Point Holdings fourth-quarter conference call. (Operator Instructions) As a reminder, this conference is being recorded.

Before I turn the conference over, I would like to read the following forward-looking statement. Thank you and good afternoon. Today's conference call may include forward-looking statements, including statements regarding Five Point's business; financial condition; results of operations; cash flows; strategies; and prospects. Forward-looking statements represent only 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 FivePoint'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 included in the risk factors section of the most recent quarterly report on Form 10-Q filed with the SEC. Please note that Five Point assumes no obligation to update any forward-looking statements.

I would now like to turn the conference over to Mr. Bob Wetenhall, EVP of Capital Markets. Please go ahead, sir.

Good afternoon. Thank you for joining our fourth-quarter and 2017 year-end conference call. I'm here this afternoon with CEO, Emile Haddad; CFO, Erik Higgins; Chief Legal Officer, Mike Alvarado; Chief Policy Officer, Greg McWilliams; and our co-COOs, Kofi Bonner and Lynn Jochim.

I'm going to hand it off to Emile, who will provide a brief recap of 2017 and our outlook for 2018, after which Erik will provide additional detail regarding our recent financial performance as well as an update on liquidity. We'd like to ask during the Q&A portion of the call that you limit your questions to one question and a follow-up so we can accommodate as many people as possible.

Thanks, Bob; and welcome, everyone. 2017 was a transformational year for Five Point. We raised $420 million when we completed our IPO and private placement in May, and then another $500 million of capital when we issued senior notes in November. These transactions have put us in a strong financial position, where we are fully funded in terms of being able to meet our land development needs.

Erik will elaborate more on this later, but I want to emphasize that Five Point is now a much stronger Company than it was even just a year ago. We also had a lot of operational success last year, including continued development at the Great Park and the start of development activities in Newhall.

Our residential efforts were complemented by our entrance into the commercial market with the acquisition of a 75% interest in FivePoint Gateway, which is a 1 million square foot commercial development in Irvine. We finished the year on a high note with lots of momentum.

2018 has also gotten off to a good start. California's economy remains solid and is especially strong in the three markets in which we operate. Limited residential construction activity, resulting from land constraints, has also created a tight housing market.

We think the combination of vibrant job growth and limited housing supply in San Francisco, Los Angeles, and Orange County will create tailwinds that support sustained home price appreciation and a continued increase in the value of our land portfolio.

In the Great Park, consistent demand since the beginning of the year gives us confidence that the spring selling season will be a rewarding one for homebuilders. We are more than 90% sold out at Parasol Park; and the brisk pace of sales bodes well for Cadence Park, our newest neighborhood that opened earlier this month, where our Great Park venture has already delivered 1,007 home sites to eight builders. We also expect to have additional residential land sales in 2018.

Switching to Newhall, we have continued with our development activities and currently expect to start deliveries in Mission Village sometime towards the end of 2019. The opening of Mission Village, which is approved for up to 4,055 home sites and approximately 1.6 million square feet of commercial development, should benefit from the robust job growth and the limited availability of home sites in Los Angeles County.

In San Francisco we are moving forward with our land development activities. Our design and development program for residential, retail, and commercial uses continues to be refined, with a focus on the Candlestick portion of the community. Finally, our efforts to secure approval for an additional 2 million square feet of office space remains underway, and we expect the process will conclude sometime before the end of 2018.

With that, I'd like to turn it over to Erik to discuss our financial performance.

Thanks, Emile; and thanks again to everybody joining us this afternoon. A summary of our financial results was included in your earnings release issued earlier this afternoon.

Fourth-quarter financial performance reflects the continued investment in our communities. As a reminder, our Newhall and San Francisco communities are wholly owned and are consolidated on our financial statements, while the Great Park venture and the FivePoint Gateway venture are unconsolidated entities, which are accounted for under the equity method of accounting.

Fourth-quarter results include a material reduction in the liability recorded for our tax receivable agreement to reflect the passage of lower corporate taxes in December. This change in estimate for the tax receivable agreement runs through our statement of operations.

I also want to remind investors that Five Point raised nearly $1 billion in fresh capital in 2017 as a result of our IPO in May, the issuance of senior notes in November, and the expansion of our corporate revolving line of credit. Our operating results for the quarter included consolidated revenues of $22.3 million, generated largely by the sale of two noncore residential land parcels; the collection of management fees; and revenue from our golf and agricultural operations. The Company did not sell any land at Newhall Ranch or the San Francisco Shipyard and Candlestick Park during the quarter.

Our investment in unconsolidated entities, which consists of our 37.5% interest in Great Park Venture and our 75% interest in Gateway Commercial Venture, decreased by $11.8 million for the quarter. This was primarily related to the Great Park Venture's recognition and accrual of incentive compensation management fee expense for services provided by the Great Park Venture's managers. The Great Park Venture did not sell any land during the fourth quarter. Our investment in Gateway Commercial Venture was unchanged.

In terms of operating costs, corporate and divisional SG&A was $30 million for the quarter. As I mentioned earlier, we recalculated the liability of the tax receivable agreement using a lower corporate tax rate due to the recent tax reform legislation which was passed in December. Going forward, our blended federal and state tax rate will decrease from 41% to 28%. As a result, the TRA liability decreased by $105.6 million, from $258 million down to $152 million. This change in estimate runs through our statement of operations.

For the fourth quarter, the net income was $81.9 million, driven primarily by the impact of the $105.6 million decline in the liability associated with the TRA. The net loss attributable to the noncontrolling interests totaled $13.4 million. As a result, net income attributable to the Company was $95.3 million.

I want to conclude by discussing liquidity and our capital position. At December 31, 2017, we had total liquidity of $972.5 million, comprised of our cash balance of $848.5 million and borrowing availability of $124 million.

During the fourth quarter our cash balance increased from $386.9 million to $848 million. The large increase reflects the issuance of $500 million of senior notes in November of 2017. Our $125 million unsecured line of credit remains available, except for $1 million of undrawn letters of credit.

We currently expect to have sufficient liquidity to fund horizontal development within our communities in accordance with our development plans without the need to access the capital markets. Our capital-raising efforts last year have enabled us to move forward with this program without straining liquidity.

Finally, total capital at the end of the fourth quarter was $1.9 billion, and our debt-to-total-cap ratio is approximately 24% at the end of the year.

With that, I will turn it over to the operator.

(Operator Instructions) Stephen Kim, Evercore ISI.

Great, thanks a lot, guys. I appreciate the opportunity to ask a question.

I guess my first one relates to San Francisco. We understand that you have been shifting the priority there to the Candlestick portion. I was wondering if you could give us a little bit of a catch-up on how the developments have been going there with respect to the cleanup, and just how we should be thinking that might affect the cadence of deliveries over the course of the next few years?

Thanks, Stephen. Just to remind everybody, the issue of the cleanup is only applicable to the -- Hunters Point, the Shipyard side, not to Candlestick. And as you know, we have been in the business of redevelopment of Navy bases for 20 years, and this comes up sometimes where there is some delay.

So we've always maintained flexibility of moving phases around to -- in contemplation of something like that. The shift to Candlestick is because we have no issues of cleanup in Candlestick, because we are putting a lot of infrastructure in Candlestick. And that will allow us now to move forward without any disruption of our business plans as we wait for the Navy to complete its obligations and deliver the parcels clean.

So in terms of the amount of revenue that you might expect to recognize over the course of the next several years, is there any change to that as you have shifted more of the focus to Candlestick? Or is it pretty much going to be -- and I should also add, not just the revenues recognized, but also the cash outlays required -- is there going to be any change to those net numbers?

There will be, but they will be to the positive when you look at it from a net cash point of view. We have spent a lot of time with the -- with Kofi and his group on making sure that when we are putting in the infrastructure, the infrastructure is optimized.

And as a result, I think we expect to have less outlay, and the revenue from Candlestick will probably increase, not decrease. So I can't give you a number right now, because we are in the middle of all of that. But I can tell you that it's going to be more actually optimized than we had before.

Thank you. Operator, next question, please.

Michael Eisen, RBC Capital Markets.

Good afternoon, guys, and congrats on a great first year. I just wanted to ask a quick question. The liquidity position is very strong, and you guys continue to make good progress on that.

Can you talk to a little bit about where you sit from a development standpoint -- how your current funds cover that? And what would cause you to need an additional capital raise to be able to help with development?

Thank you. Well, right now, as we stated, the capital we have -- the liquidity we have -- we expect that to cover us for all of our land development activities on all the assets. Unless something changes, our need to go raise capital will be more for strategic reasons. Whether we want to go ahead and raise capital for any vertical opportunities or things like that, that's something that we will evaluate as we go. But for land development, we have the liquidity that we need to move forward with our plans.

And then just following up on those comments, when thinking about the strategic position you are in and some commentary around your ability to get additional entitlement, have you guys been looking for any change in the original entitlement plan? Have there been any additions to what the lot sizes are of the three communities? And is there any potential for more vertical development on those communities in the next couple of years?

Yes. I mean, these are, I think, three different questions. One is -- in terms of the entitlements, we're always looking for opportunities to make sure that our entitlements match market needs, and that's one of the benefits we have.

When you ask about additive, as I said, San Francisco -- we are going through that process right now with the city, to where we expect that sometime before the end of the year we will add 2 million square feet of office entitlements to what we have right now. In terms of lot sizes and configuration, that's something that we visit in real time every day to make sure that we are catering to the widest base buyers in the market and we are optimizing the value of our land.

And I think that was the last -- oh, our vertical. The answer is yes. You should expect that we are going to be talking more and more about us going vertical on the income-producing side on each of our communities.

Stephen East, Wells Fargo.

Thanks. Actually, this is Paul Przybylski on for Stephen. First question I have is on Newhall. Is there any update on maybe the number of lots that you expect to sell next year or the revenue that that could generate?

No, we are not in a position to give exact numbers yet. I think that as I said, our first village is approved for 4,055 home sites and 1.6 million square feet of commercial.

And we are right now seven months into land development, and until later in the year, we really won't be able to get a good feel for exactly how many home sites we will be delivering. But we know that we will have deliveries next year, unless we end up with a rainy season that's not expected next year. But I can tell you exactly the number of home sites yet.

Okay. And then do you have any expectations on the delay for the Navy's conveyance of the land in San Francisco?

No, as I said, what we did with the potential delay is we shifted our focus to Candlestick. And really, none of these parcels that are subject to this potential delay are in our business plan anymore in the near future. We shifted all of that to Candlestick. And therefore we are going to let the Navy go through its issues, and we will take the land when the land is ready and signed off by everybody.

Okay. And then, finally, just kind of a bookkeeping question. With regard to the interest on your new debt, how should we think of the breakout of that -- that will be capitalized versus directly expensed quarterly, or will you be able to capitalize all of it?

Yes, we will be capitalizing all of the interest expense.

Okay.

Alan Ratner, Zelman & Associates.

Good afternoon. Thanks for taking my questions.

First one, just on development spend: do you have a final number for 2017 on what you spent on development at Hunters Point and Newhall, and a forecast for 2018?

No, we don't. And I don't think we are planning to give these type of breakdowns going forward, unless they are already in the financials. Erik, do you --?

I think -- well, in terms -- for the year, Emile, at Newhall, I think the additions to inventory was about $85 million. And in San Francisco it's about $65 million, right around there. And that's in addition to the inventory.

Right. But since there were no, I guess, sales there, that we should think about that as development spend, right?

Well, we had a large sale in San Francisco. So the cost of sales on that was a little over $80 million. So the numbers that I referenced to you were the additions to inventory. And the changes in inventory you would have to note the cost of sales against that.

Right. Okay. Thanks, Erik, for that.

And then just two more kind of bookkeeping ones. Just on the Macerich JV: is the change there -- I would imagine it's not, because that's at Candlestick, but does that affect the timing at all of that joint venture?

It could affect the timing. And we are, in real time, in discussions with Macerich on the retail configuration.

It's not a secret that the retail world is going through some major shifts, and we want to make sure that what we are doing is actually something that's going to work for the future. And we feel like we have a partner who is best in breed in that world, and we look to them to help us understand that. But some of that redesign and some of the rethinking might have an impact on the timing.

Got it. And then final question, just a little bit more strategic, Emile: given tax reform and the move in rates that we've seen -- although we've seen some moderation more recently -- just curious, as you think about the next phase at Great Park and maybe the first phase at Newhall, are you changing your thinking, just as far as either lot sizes or product type, based on more concern over affordability at all? Or have you not seen any impact from that?

Well, I think we are always looking at the sizes and the configuration of our home sites and our homes with an eye on affordability. We haven't reached a point of real concern yet in our markets, notwithstanding the fact that we are starting to see some, really, price escalations.

But if you see what we have done at the Great Park, you will see that we have a very diversified product offering. And what we do is we don't look only at the size of the homes, because higher density homes on a stand-alone are not -- that doesn't give you the answer.

So we look at that combined with the lifestyle around it that people would like to be living within. So the answer to your question is yes; and we do that, believe it or not, almost weekly.

Michael Rehaut, JPMorgan.

Thanks. Good afternoon, everyone. I guess I just wanted to take a step back; obviously, different moving pieces with Great Park, Newhall, and particularly the Shipyard. Coming out of the box a year ago, the overall trajectory of consolidated cash flows from operations was negative cash flow, and we had in our model an average of roughly negative -- $200 million in 2018 and 2019, then being roughly breakeven in 2020 before generating sizable cash flow in 2021.

Given some of the developments, obviously, over the last six months -- and it was interesting, Emile, that you mentioned that you think the changes would be actually a net positive for the shift in approach in the Shipyard -- was hoping to get an update to that type of broad cash flow timeline, if that's still the case that you are looking at still solidly negative cash flows in 2018 and 2019, roughly breakeven in 2020 before a strong year in 2021? Or is there any type of, perhaps, moderation of those negative cash flows relative to original expectations in this year and next, or just how to think about that -- if there is any kind of change in timing, let's say?

Sure. Well, if you're trying to benchmark off what you saw when we were going through the IPO, we moved up the timing of start of land development and deliveries at Newhall by a year. That obviously meant that we now started spending money on Newhall earlier than we projected, and we started in 2017 and the later part of 2017. And we will be spending a lot of money in 2018 and 2019 to get to that point where we move to a cash flow positive. Probably the biggest impact on the cash flow comes from the activities on Newhall, but it's good news, because it's actually moved up.

As it relates to what happens post-2020, right now the way we look at it is that also moves up by about a year, where we -- rather than wait until the end of 2020, beginning of 2021 to turn cash flow positive, right now our plans show us that we will actually be in that position a year earlier, by the first quarter of 2020 rather than the first quarter of 2021.

Okay. And then, like, what you are saying also is -- to your earlier point around the Shipyard -- that the Shipyard cash flows would also be slightly better in the near to medium term as well?

Yes. We expect that to happen. And as I said, it's all in the works right now. But we expect that you are going to see more efficiency coming out of the Candlestick side than we had before.

Nishu Sood, Deutsche Bank.

Hi, it's actually Tim Daley on for Nishu. Thank you for the question.

So I guess first -- so builders have gotten a boost in buying power following the recent tax reform. So in your discussions with land acquisition teams and builder management over the last couple of months, have you noticed a change in their willingness to maybe spend a bit more? Have you noticed easing of underwriting standards, competition heating up? If you can, just help us understand, pre- and post-tax reform, how you are dealing with the builders.

Well, I mean, I don't think that there is easing in underwriting, because I think that you have a breed of builders today -- that actually we sell to -- who are very smart in the way they underwrite. And I think that what we see, at least in our markets, which are very unique markets, is an extreme lack of supply of home sites and a high demand because of the job creation in San Francisco, Los Angeles, and Orange County.

The builders have performed very well in our communities, and I think we are seeing repeat buyers. And we still see builders factor in home price appreciation in our marketplace. And I haven't seen anything directly related to the taxes or anything like that, but I can tell you that we are seeing a lot of enthusiasm from our builders and a lot of questions about when is the next round of home site sales.

Understood. That's good to hear. And then just kind of sticking with tax reform, so other than the TRA, have there been any other changes to the ownership structure -- any of the promotes, distributions, anything along those lines, just as -- due to the change in the corporate tax rate? Thank you.

No.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the call back over to management for closing remarks.

Everybody, thank you for joining us. We appreciate it and look forward to speaking with you next quarter. Have a great afternoon.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.