Five Point Holdings, LLC - Quarter Report: 2020 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-38088
Five Point Holdings, LLC
(Exact name of registrant as specified in its charter)
| Delaware | 27-0599397 | ||||||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||||||||
15131 Alton Parkway | 4th Floor | Irvine | California | 92618 | |||||||||||||
(Address of Principal Executive Offices) | (Zip code) | ||||||||||||||||
(949) 349-1000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Class A common shares | FPH | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☒ | |||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |||||||||||
Emerging growth company | ☒ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 30, 2020, 69,056,591 Class A common shares and 79,233,544 Class B common shares were outstanding.
FIVE POINT HOLDINGS, LLC
TABLE OF CONTENTS
FORM 10-Q
Page | ||||||||
PART I. FINANCIAL INFORMATION | ||||||||
ITEM 1. | ||||||||
ITEM 2. | ||||||||
ITEM 3. | ||||||||
ITEM 4. | ||||||||
PART II. OTHER INFORMATION | ||||||||
ITEM 1. | ||||||||
ITEM 1A. | ||||||||
ITEM 2. | ||||||||
ITEM 3. | ||||||||
ITEM 4. | ||||||||
ITEM 5. | ||||||||
ITEM 6. | ||||||||
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are subject to risks and uncertainties. These statements concern expectations, beliefs, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “would,” “result” and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements. This report may contain forward-looking statements regarding: our expectations of our future revenues, costs and financial performance; future demographics and market conditions in the areas where our communities are located; the outcome of pending litigation and its effect on our operations; the timing of our development activities; and the timing of future real estate purchases or sales, including anticipated deliveries of homesites and anticipated amenities in our communities.
We caution you that any forward-looking statements presented in this report are based on our current views and information currently available to us. Forward-looking statements are subject to risks, trends, uncertainties and factors that are beyond our control. We believe these risks and uncertainties include, but are not limited to, the following:
•uncertainties and risks related to public health issues such as a major epidemic or pandemic, including the recent outbreak of COVID-19;
•risks associated with the real estate industry;
•downturns in economic conditions or demographic changes at the national, regional or local levels, particularly in the areas where our properties are located;
•uncertainty and risks related to zoning and land use laws and regulations, including environmental planning and protection laws;
•risks associated with development and construction projects;
•adverse developments in the economic, political, competitive or regulatory climate of California;
•loss of key personnel;
•uncertainties and risks related to adverse weather conditions, natural disasters and climate change;
•fluctuations in interest rates;
•the availability of cash for distribution and debt service and exposure to risk of default under debt obligations;
•exposure to liability relating to environmental and health and safety matters;
•exposure to litigation or other claims;
•insufficient amounts of insurance or exposure to events that are either uninsured or underinsured;
•intense competition in the real estate market and our ability to sell properties at desirable prices;
•fluctuations in real estate values;
•changes in property taxes;
•risks associated with our trademarks, trade names and service marks;
•conflicts of interest with our directors;
•general volatility of the capital and credit markets and the price of our Class A common shares; and
•risks associated with public or private financing or the unavailability thereof.
Please see Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 for a more detailed discussion of these and other risks.
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you therefore against relying on any of these forward-looking statements.
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. They are based on estimates and assumptions only as of the date of this report. We undertake no obligation to update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by applicable law.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except shares)
(Unaudited)
| March 31, 2020 | December 31, 2019 | ||||||||||
ASSETS | |||||||||||
INVENTORIES | $ | 1,958,901 | $ | 1,889,761 | |||||||
INVESTMENT IN UNCONSOLIDATED ENTITIES | 501,909 | 533,239 | |||||||||
PROPERTIES AND EQUIPMENT, NET | 33,071 | 32,312 | |||||||||
INTANGIBLE ASSET, NET—RELATED PARTY | 77,990 | 80,350 | |||||||||
CASH AND CASH EQUIVALENTS | 247,754 | 346,833 | |||||||||
RESTRICTED CASH AND CERTIFICATES OF DEPOSIT | 1,742 | 1,741 | |||||||||
RELATED PARTY ASSETS | 95,148 | 97,561 | |||||||||
OTHER ASSETS | 20,908 | 22,903 | |||||||||
TOTAL | $ | 2,937,423 | $ | 3,004,700 | |||||||
LIABILITIES AND CAPITAL | |||||||||||
LIABILITIES: | |||||||||||
Notes payable, net | $ | 616,430 | $ | 616,046 | |||||||
Accounts payable and other liabilities | 161,665 | 167,711 | |||||||||
Related party liabilities | 126,958 | 127,882 | |||||||||
Deferred income tax liability, net | 11,628 | 11,628 | |||||||||
Payable pursuant to tax receivable agreement | 173,248 | 172,633 | |||||||||
Total liabilities | 1,089,929 | 1,095,900 | |||||||||
COMMITMENTS AND CONTINGENT LIABILITIES (Note 12) | |||||||||||
REDEEMABLE NONCONTROLLING INTEREST | 25,000 | 25,000 | |||||||||
CAPITAL: | |||||||||||
Class A common shares; No par value; Issued and outstanding: 2020—69,061,898 shares; 2019—68,788,257 shares | |||||||||||
Class B common shares; No par value; Issued and outstanding: 2020—79,233,544 shares; 2019—79,233,544 shares | |||||||||||
Contributed capital | 569,772 | 571,532 | |||||||||
Retained earnings | 17,843 | 42,844 | |||||||||
Accumulated other comprehensive loss | (2,671) | (2,682) | |||||||||
Total members’ capital | 584,944 | 611,694 | |||||||||
Noncontrolling interests | 1,237,550 | 1,272,106 | |||||||||
Total capital | 1,822,494 | 1,883,800 | |||||||||
TOTAL | $ | 2,937,423 | $ | 3,004,700 | |||||||
See accompanying notes to unaudited condensed consolidated financial statements.
1
FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
REVENUES: | |||||||||||
Land sales | $ | 6 | $ | 55 | |||||||
Land sales—related party | 10 | 230 | |||||||||
Management services—related party | 8,244 | 11,063 | |||||||||
Operating properties | 960 | 1,725 | |||||||||
Total revenues | 9,220 | 13,073 | |||||||||
COSTS AND EXPENSES: | |||||||||||
Land sales | — | — | |||||||||
Management services | 6,051 | 7,616 | |||||||||
Operating properties | 1,945 | 1,901 | |||||||||
Selling, general, and administrative | 24,626 | 25,773 | |||||||||
Total costs and expenses | 32,622 | 35,290 | |||||||||
OTHER INCOME: | |||||||||||
Interest income | 1,006 | 2,454 | |||||||||
Gain on settlement of contingent consideration—related party | — | 64,870 | |||||||||
Miscellaneous | 88 | 10 | |||||||||
Total other income | 1,094 | 67,334 | |||||||||
EQUITY IN (LOSS) EARNINGS FROM UNCONSOLIDATED ENTITIES | (30,911) | 8,882 | |||||||||
(LOSS) INCOME BEFORE INCOME TAX (PROVISION) BENEFIT | (53,219) | 53,999 | |||||||||
INCOME TAX (PROVISION) BENEFIT | — | (1,266) | |||||||||
NET (LOSS) INCOME | (53,219) | 52,733 | |||||||||
LESS NET (LOSS) INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (28,413) | 28,925 | |||||||||
NET (LOSS) INCOME ATTRIBUTABLE TO THE COMPANY | $ | (24,806) | $ | 23,808 | |||||||
NET (LOSS) INCOME ATTRIBUTABLE TO THE COMPANY PER CLASS A SHARE | |||||||||||
Basic | $ | (0.36) | $ | 0.35 | |||||||
Diluted | $ | (0.37) | $ | 0.35 | |||||||
WEIGHTED AVERAGE CLASS A SHARES OUTSTANDING | |||||||||||
Basic | 66,649,866 | 66,210,916 | |||||||||
Diluted | 68,792,585 | 145,296,469 | |||||||||
NET (LOSS) INCOME ATTRIBUTABLE TO THE COMPANY PER CLASS B SHARE | |||||||||||
Basic and diluted | $ | (0.00) | $ | 0.00 | |||||||
WEIGHTED AVERAGE CLASS B SHARES OUTSTANDING | |||||||||||
Basic | 79,233,544 | 79,061,835 | |||||||||
Diluted | 79,233,544 | 79,275,234 | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
NET (LOSS) INCOME | $ | (53,219) | $ | 52,733 | |||||||
OTHER COMPREHENSIVE INCOME: | |||||||||||
Reclassification of actuarial loss on defined benefit pension plan included in net (loss) income | 24 | 35 | |||||||||
Other comprehensive income before taxes | 24 | 35 | |||||||||
INCOME TAX PROVISION RELATED TO OTHER COMPREHENSIVE INCOME | — | — | |||||||||
OTHER COMPREHENSIVE INCOME—Net of tax | 24 | 35 | |||||||||
COMPREHENSIVE (LOSS) INCOME | (53,195) | 52,768 | |||||||||
LESS COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (28,404) | 28,938 | |||||||||
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO THE COMPANY | $ | (24,791) | $ | 23,830 | |||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL
(In thousands, except share amounts)
(Unaudited)
| Class A Common Shares | Class B Common Shares | Contributed Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Members’ Capital | Noncontrolling Interests | Total Capital | ||||||||||||||||||||||||||||||||||||||||
| BALANCE - December 31, 2019 | 68,788,257 | 79,233,544 | $ | 571,532 | $ | 42,844 | $ | (2,682) | $ | 611,694 | $ | 1,272,106 | $ | 1,883,800 | |||||||||||||||||||||||||||||||||
Adoption of new accounting standards at unconsolidated entities | — | — | — | (195) | — | (195) | (224) | (419) | |||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | (24,806) | — | (24,806) | (28,413) | (53,219) | |||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | 3,012 | — | — | 3,012 | — | 3,012 | |||||||||||||||||||||||||||||||||||||||
Reacquisition of share-based compensation awards for tax-withholding purposes | (436,675) | — | (5,521) | — | — | (5,521) | — | (5,521) | |||||||||||||||||||||||||||||||||||||||
Settlement of restricted share units for Class A common shares | 335,078 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Issuance of share-based compensation awards, net of forfeitures | 375,238 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income—net of tax of $0 | — | — | — | — | 15 | 15 | 9 | 24 | |||||||||||||||||||||||||||||||||||||||
Tax distribution to noncontrolling interest | — | — | — | — | — | — | (4,568) | (4,568) | |||||||||||||||||||||||||||||||||||||||
Adjustment to liability recognized under tax receivable agreement—net of tax of $0 | — | — | (615) | — | — | (615) | — | (615) | |||||||||||||||||||||||||||||||||||||||
Adjustment of noncontrolling interest in the Operating Company | — | — | 1,364 | — | (4) | 1,360 | (1,360) | — | |||||||||||||||||||||||||||||||||||||||
| BALANCE - March 31, 2020 | 69,061,898 | 79,233,544 | $ | 569,772 | $ | 17,843 | $ | (2,671) | $ | 584,944 | $ | 1,237,550 | $ | 1,822,494 | |||||||||||||||||||||||||||||||||
| BALANCE - December 31, 2018 | 66,810,980 | 78,838,736 | $ | 556,521 | $ | 33,811 | $ | (3,306) | $ | 587,026 | $ | 1,261,491 | $ | 1,848,517 | |||||||||||||||||||||||||||||||||
Net income | — | — | — | 23,808 | — | 23,808 | 28,925 | 52,733 | |||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | 3,316 | — | — | 3,316 | — | 3,316 | |||||||||||||||||||||||||||||||||||||||
Reacquisition of share-based compensation awards for tax-withholding purposes | (296,392) | — | (4,099) | — | — | (4,099) | — | (4,099) | |||||||||||||||||||||||||||||||||||||||
Settlement of restricted share units for Class A common shares | 337,799 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Issuance of share-based compensation awards, net of forfeitures | 1,894,168 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income—net of tax of $0 | — | — | — | — | 22 | 22 | 13 | 35 | |||||||||||||||||||||||||||||||||||||||
Contribution from noncontrolling interest and related sale of Class B common shares | — | 436,498 | 3 | — | — | 3 | 5,544 | 5,547 | |||||||||||||||||||||||||||||||||||||||
Adjustment to liability recognized under tax receivable agreement—net of tax of $0 | — | — | (1,696) | — | — | (1,696) | — | (1,696) | |||||||||||||||||||||||||||||||||||||||
Adjustment of noncontrolling interest in the Operating Company | — | — | 8,140 | — | (36) | 8,104 | (8,104) | — | |||||||||||||||||||||||||||||||||||||||
| BALANCE - March 31, 2019 | 68,746,555 | 79,275,234 | $ | 562,185 | $ | 57,619 | $ | (3,320) | $ | 616,484 | $ | 1,287,869 | $ | 1,904,353 | |||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
Net (loss) income | $ | (53,219) | $ | 52,733 | |||||||
Adjustments to reconcile net (loss) income to net cash used in operating activities: | |||||||||||
Equity in loss (earnings) from unconsolidated entities | 30,911 | (8,882) | |||||||||
Deferred income taxes | — | 1,266 | |||||||||
Depreciation and amortization | 3,711 | 5,578 | |||||||||
Gain on settlement of contingent consideration—related party | — | (64,870) | |||||||||
Share-based compensation | 3,012 | 3,316 | |||||||||
Changes in operating assets and liabilities: | |||||||||||
Inventories | (68,672) | (47,863) | |||||||||
Related party assets | 167 | (3,588) | |||||||||
Other assets | 1,411 | 1,394 | |||||||||
Accounts payable and other liabilities | (6,403) | (19,417) | |||||||||
Related party liabilities | (344) | (3,319) | |||||||||
Net cash used in operating activities | (89,426) | (83,652) | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
Distribution from indirect Legacy Interest in Great Park Venture—related party | 1,721 | — | |||||||||
Distribution from Gateway Commercial Venture | — | 1,463 | |||||||||
Purchase of properties and equipment | (704) | (1,196) | |||||||||
Net cash provided by investing activities | 1,017 | 267 | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
Related party reimbursement obligation | (580) | — | |||||||||
Principal payment on Macerich note | — | (65,130) | |||||||||
Reacquisition of share-based compensation awards for tax-withholding purposes | (5,521) | (4,099) | |||||||||
Proceeds of Class B common share offering | — | 3 | |||||||||
Tax distribution to noncontrolling interest | (4,568) | — | |||||||||
Contribution from noncontrolling interest | — | 5,544 | |||||||||
Proceeds from issuance of redeemable noncontrolling interest | — | 25,000 | |||||||||
Net cash used in financing activities | (10,669) | (38,682) | |||||||||
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | (99,078) | (122,067) | |||||||||
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—Beginning of period | 348,574 | 497,097 | |||||||||
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—End of period | $ | 249,496 | $ | 375,030 | |||||||
SUPPLEMENTAL CASH FLOW INFORMATION (Note 13)
See accompanying notes to unaudited condensed consolidated financial statements.
5
FIVE POINT HOLDINGS, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BUSINESS AND ORGANIZATION
Five Point Holdings, LLC, a Delaware limited liability company (the “Holding Company” and, together with its consolidated subsidiaries, the “Company”), is an owner and developer of mixed-use, master-planned communities in California. The Holding Company owns all of its assets and conducts all of its operations through Five Point Operating Company, LP, a Delaware limited partnership (the “Operating Company”), and its subsidiaries.
The Company has two classes of shares outstanding: Class A common shares and Class B common shares. Holders of Class A common shares and holders of Class B common shares are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders, and are both entitled to receive distributions at the same time. However, the distributions paid to holders of our Class B common shares are in an amount per share equal to 0.0003 multiplied by the amount paid per Class A common share.
The diagram below presents a simplified depiction of the Company’s current organizational structure as of March 31, 2020:
(1) A wholly owned subsidiary of the Holding Company serves as the sole managing general partner of the Operating Company. As of March 31, 2020, the Company owned approximately 62.5% of the outstanding Class A Common Units of the Operating Company. After a one year holding period, a holder of Class A Common Units of the Operating Company can exchange the units for, at the Company’s option, either Class A common shares of the Holding Company, on a one-for-one basis, or cash equal to the fair market value of such shares. Assuming the exchange of all outstanding Class A Common Units of the Operating Company and all outstanding Class A units of The Shipyard Communities, LLC, a Delaware limited liability company (the “San Francisco Venture”) (see (2) below), that are not held by the Company, based on the closing price of the Company’s Class A common shares on April 30, 2020 ($5.64), the equity market capitalization of the Company was approximately $836.5 million.
6
(2) The Operating Company owns all of the outstanding Class B units of the San Francisco Venture, the entity developing the Candlestick and The San Francisco Shipyard communities. The Class A units of the San Francisco Venture, which the Operating Company does not own, are intended to be economically equivalent to Class A Common Units of the Operating Company. As the holder of all outstanding Class B units, the Operating Company is entitled to receive 99% of available cash from the San Francisco Venture after the holders of Class A units in the San Francisco Venture have received distributions equivalent to the distributions, if any, paid on Class A Common Units of the Operating Company. Class A units of the San Francisco Venture can be exchanged, on a one-for-one basis, for Class A Common Units of the Operating Company (See Note 5).
(3) Together, the Operating Company, Five Point Communities, LP, a Delaware limited partnership (“FP LP”), and Five Point Communities Management, Inc., a Delaware corporation (“FP Inc.” and together with FP LP, the “Management Company”) own 100% of Five Point Land, LLC, a Delaware limited liability company (“FPL”), the entity developing Valencia (formerly known as Newhall Ranch), a master-planned community located in northern Los Angeles County, California. The Operating Company has a controlling interest in the Management Company.
(4) Interests in Heritage Fields LLC, a Delaware limited liability company (the “Great Park Venture”), are either “Percentage Interests” or “Legacy Interests.” Holders of the Legacy Interests are entitled to receive priority distributions in an amount up to $565.0 million, of which $431.3 million had been distributed as of April 30, 2020. The Company owns a 37.5% Percentage Interest in the Great Park Venture and serves as its administrative member. However, management of the Great Park Venture is vested in the four voting members, who have a total of five votes. Major decisions generally require the approval of at least 75% of the votes of the voting members. The Company has two votes, and the other three voting members each have one vote, so the Company is unable to approve any major decision without the consent or approval of at least two of the other voting members. The Company does not include the Great Park Venture as a consolidated subsidiary, but rather as an equity method investee, in its consolidated financial statements.
(5) The Company owns a 75% interest in Five Point Office Venture Holdings I, LLC, a Delaware limited liability company (the “Gateway Commercial Venture”). The Gateway Commercial Venture owns approximately 73 acres of commercial land in the Great Park Neighborhoods, on which four buildings have been newly constructed with an aggregate of approximately one million square feet of research and development and office space (the “Five Point Gateway Campus”). The Company manages the Gateway Commercial Venture, however, the manager’s authority is limited. Major decisions by the Gateway Commercial Venture generally require unanimous approval by an executive committee composed of two people designated by the Company and two people designated by another investor. Some decisions require approval by all of the members of the Gateway Commercial Venture. The Company does not include the Gateway Commercial Venture as a consolidated subsidiary, but rather as an equity method investee, in its consolidated financial statements.
2. BASIS OF PRESENTATION
Principles of consolidation—The accompanying condensed consolidated financial statements include the accounts of the Holding Company and the accounts of all subsidiaries in which the Holding Company has a controlling interest and the consolidated accounts of variable interest entities (“VIEs”) in which the Holding Company is deemed to be the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.
Unaudited interim financial information—The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. In the opinion of management, all adjustments (including normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full year.
7
Use of estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Management evaluates its estimates on an ongoing basis and makes revisions to these estimates and related disclosures as experience develops or new information becomes known. Actual results could differ from those estimates.
The efforts that have been implemented at the national, state and local levels to combat and mitigate a rapid spread of a global coronavirus (COVID-19) pandemic have severely impacted daily activities and the economies of California and the United States. At this time, the Company is limiting development activities at the Company’s communities. While the Company is closely monitoring government guidelines and developments in the response to the COVID-19 outbreak, the extent to which COVID-19 impacts the Company’s results will depend on future developments, including the extent and duration of precautionary measures to slow the outbreak and impacts on employment and other economic conditions affecting the Company’s business. Due to the uncertainties associated with COVID-19, the Company’s estimates of the impacts to its future results of operations, financial condition or cash flows may materially change.
Miscellaneous other income—Miscellaneous other income consisted of the following (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Net periodic pension benefit | $ | 88 | $ | 10 | |||||||
| Total miscellaneous other income | $ | 88 | $ | 10 | |||||||
Recently adopted accounting pronouncements—In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”) which amends the guidance on the impairment of financial instruments, including most debt instruments, trade receivables, contract assets, and loans. ASU No. 2016-13 adds to U.S. GAAP an impairment model known as the current expected credit loss model, or CECL, that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses for instruments measured at amortized cost, resulting in a net presentation of the amount expected to be collected on the financial asset. The Company and its unconsolidated entities adopted ASU No. 2016-13 on January 1, 2020 using a modified retrospective approach with no material impact on the Company’s consolidated financial statements.
Under the new guidance, the Company performs a credit loss assessment for new financial assets obtained on a pooling basis by financial asset type (i.e. contract assets, trade receivables, investments, etc.) and estimates an allowance of expected credit loss. Factors considered in the estimation of expected credit loss include, but are not limited to, historical loss experience, third-party default rates on similar financial assets, credit-rating agency ratings and qualitative macroeconomic conditions. The Company continually monitors its credit loss exposure by evaluating changes in economic conditions or significant events and how that may impact current credit loss estimates. At March 31, 2020, there was no material allowance for credit loss.
8
3. REVENUES
The following tables present the Company’s consolidated revenues disaggregated by revenue source and reporting segment (see Note 14) (in thousands):
| Three Months Ended March 31, 2020 | |||||||||||||||||||||||||||||
| Valencia | San Francisco | Great Park | Commercial | Total | |||||||||||||||||||||||||
| Land sales | $ | 16 | $ | — | $ | — | $ | — | $ | 16 | |||||||||||||||||||
| Management services | — | 795 | 7,352 | 97 | 8,244 | ||||||||||||||||||||||||
| Operating properties | 493 | 180 | — | — | 673 | ||||||||||||||||||||||||
| 509 | 975 | 7,352 | 97 | 8,933 | |||||||||||||||||||||||||
| Operating properties leasing revenues | 287 | — | — | — | 287 | ||||||||||||||||||||||||
| $ | 796 | $ | 975 | $ | 7,352 | $ | 97 | $ | 9,220 | ||||||||||||||||||||
| Three Months Ended March 31, 2019 | |||||||||||||||||||||||||||||
| Valencia | San Francisco | Great Park | Commercial | Total | |||||||||||||||||||||||||
| Land sales | $ | 64 | $ | 221 | $ | — | $ | — | $ | 285 | |||||||||||||||||||
| Management services | — | 698 | 10,396 | (31) | 11,063 | ||||||||||||||||||||||||
| Operating properties | 1,253 | 174 | — | — | 1,427 | ||||||||||||||||||||||||
| 1,317 | 1,093 | 10,396 | (31) | 12,775 | |||||||||||||||||||||||||
| Operating properties leasing revenues | 298 | — | — | — | 298 | ||||||||||||||||||||||||
| $ | 1,615 | $ | 1,093 | $ | 10,396 | $ | (31) | $ | 13,073 | ||||||||||||||||||||
The opening and closing balances of the Company’s contract assets for the three months ended March 31, 2020 were $73.0 million ($68.1 million related party, see Note 8) and $75.7 million ($70.5 million related party, see Note 8), respectively. The opening and closing balances of the Company’s contract assets for the three months ended March 31, 2019 were $50.6 million ($49.8 million related party) and $57.3 million ($55.5 million related party), respectively. The increase of $2.7 million and $6.7 million for the three months ended March 31, 2020 and 2019, respectively, between the opening and closing balances of the Company’s contract assets primarily result from a timing difference between the Company’s recognition of revenue earned for the performance of management services and no contractual payments due from the customer during the period.
The opening and closing balances of the Company’s receivables from contracts with customers and contract liabilities for the three months ended March 31, 2020 and 2019 were insignificant.
The Company, through the Management Company, has a development management agreement, as amended and restated (“A&R DMA”), with the Great Park Venture. The A&R DMA has an original term commencing on December 29, 2010 and ending on December 31, 2021, with options to renew upon mutual agreement for three additional years and then two additional years. Consideration in the form of contingent incentive compensation from the A&R DMA is recognized as revenue and a contract asset as services are provided over the expected contract term, with contractual payments payable in connection with, and as a percentage of, distributions made to the members of the Great Park Venture. As of March 31, 2020, the aggregate amount of the estimated transaction price allocated to the Company’s partially unsatisfied performance obligations associated with the A&R DMA was $24.0 million. Subject to changes in the estimated transaction price and constraints on the transaction price, the Company will recognize this revenue ratably as services are provided over the remaining expected contract term.
9
4. INVESTMENT IN UNCONSOLIDATED ENTITIES
Great Park Venture
The Great Park Venture has two classes of interests—“Percentage Interests” and “Legacy Interests.” Legacy Interest holders are entitled to receive priority distributions in an aggregate amount equal to $476.0 million and up to an additional $89.0 million from subsequent distributions of cash depending on the performance of the Great Park Venture. The holders of the Percentage Interests will receive all other distributions. The Operating Company owns 37.5% of the Great Park Venture’s Percentage Interests as of March 31, 2020. The Great Park Venture has made distributions to the holders of Legacy Interests in the aggregate amount of $431.3 million as of March 31, 2020.
The Great Park Venture is the owner of Great Park Neighborhoods, a mixed-use, master-planned community located in Orange County, California. The Company, through the Management Company, manages the planning, development and sale of the Great Park Neighborhoods and supervises the day-to-day affairs of the Great Park Venture. The Great Park Venture is managed by an executive committee of representatives appointed by only the holders of Percentage Interests. The Company does not control the actions of the executive committee.
At each reporting period, and when events and circumstances dictate, the Company evaluates its equity method investment in the Great Park Venture for impairment. This evaluation focuses on the recoverability of the carrying value based upon the discounted value of distributions the Company expects to receive from the Great Park Venture. This evaluation is performed at the investment level and is separate and apart from impairment evaluations on long-lived assets, such as the Company’s consolidated inventory balances, that focus on recoverability with undiscounted cash flows. The Company evaluates the investment as a whole and does not evaluate the underlying assets of the Great Park Venture for impairment. If the Great Park Venture records an impairment charge against its assets, the Company will recognize its share of the loss, adjusted for basis differences. During the three months ended March 31, 2020 and 2019, the Great Park Venture did not recognize any impairment losses on its long-lived assets.
At March 31, 2020, the Company determined that an other-than-temporary impairment existed for the Company’s investment in the Great Park Venture as the estimated fair value of the investment was less than the carrying value. This was the result of a delay in the projected distributions from Great Park Venture to the Company. In determining that the impairment was other-than-temporary, the Company concluded that it was uncertain if a near term recovery of value that was lost as a result of delays to expected land sales from the impacts of the COVID-19 pandemic would occur. As a result, the Company recognized a $26.9 million impairment charge included in equity in loss from unconsolidated entities on the condensed consolidated statement of operations during the three months ended March 31, 2020.
Below are the most significant unobservable inputs used in the Company’s discounted cash flow model to determine the estimated fair value (level 3) of the Company’s investment in the Great Park Venture at March 31, 2020:
| Unobservable inputs | Range | |||||||
| Annual home price appreciation | 0% - 7% | |||||||
| Annual horizontal development cost appreciation | 0% - 3% | |||||||
| Average annual absorption of homesites (market rate homesites) | 900 | |||||||
| 2020 home price range | $640,000 - $1,300,000 | |||||||
| Unlevered discount rate | 9% | |||||||
The cost of the Company’s investment in the Great Park Venture, adjusted for impairments, is higher than the Company’s underlying equity in the carrying value of net assets of the Great Park Venture (basis difference). The Company’s earnings from the equity method investment are adjusted by amortization and accretion of the basis differences as the assets (mainly inventory) and liabilities that gave rise to the basis difference are sold, settled or amortized.
10
During the three months ended March 31, 2020 and 2019, the Great Park Venture recognized $0.7 million and $127.7 million, respectively, in land sale revenues to a related party of the Company. The following table summarizes the statements of operations of the Great Park Venture for the three months ended March 31, 2020 and 2019 and reconciles the Company’s share to the amount recognized as equity in (loss) earnings (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
Land sale revenues | $ | 22,176 | $ | 159,163 | |||||||
Cost of land sales | (15,304) | (107,819) | |||||||||
Other costs and expenses | (11,190) | (14,233) | |||||||||
Net (loss) income of Great Park Venture | $ | (4,318) | $ | 37,111 | |||||||
The Company’s share of net (loss) income | $ | (1,619) | $ | 13,917 | |||||||
Basis difference amortization | (1,890) | (4,473) | |||||||||
Other-than-temporary investment impairment | (26,851) | — | |||||||||
Equity in (loss) earnings from Great Park Venture | $ | (30,360) | $ | 9,444 | |||||||
The following table summarizes the balance sheet data of the Great Park Venture and the Company’s investment balance as of March 31, 2020 and December 31, 2019 (in thousands):
| March 31, 2020 | December 31, 2019 | ||||||||||
Inventories | $ | 890,152 | $ | 870,861 | |||||||
Cash and cash equivalents | 185,540 | 293,002 | |||||||||
Receivable and other assets | 30,327 | 32,395 | |||||||||
Total assets | $ | 1,106,019 | $ | 1,196,258 | |||||||
Accounts payable and other liabilities | $ | 151,435 | $ | 159,965 | |||||||
Distribution payable to Legacy Interests | — | 76,272 | |||||||||
Redeemable Legacy Interests | 133,695 | 133,695 | |||||||||
Capital (Percentage Interest) | 820,889 | 826,326 | |||||||||
Total liabilities and capital | $ | 1,106,019 | $ | 1,196,258 | |||||||
The Company’s share of capital in Great Park Venture | $ | 307,834 | $ | 309,872 | |||||||
Unamortized basis difference | 93,222 | 121,963 | |||||||||
The Company’s investment in the Great Park Venture | $ | 401,056 | $ | 431,835 | |||||||
Gateway Commercial Venture
The Company owns a 75% interest in the Gateway Commercial Venture as of March 31, 2020. The Gateway Commercial Venture is governed by an executive committee in which the Company is entitled to appoint two individuals. One of the other members of the Gateway Commercial Venture is also entitled to appoint two individuals to the executive committee. The unanimous approval of the executive committee is required for certain matters, which limits the Company’s ability to control the Gateway Commercial Venture. However, the Company is able to exercise significant influence and therefore accounts for its investment in the Gateway Commercial Venture using the equity method. The Company is the manager of the Gateway Commercial Venture, with responsibility to manage and administer its day-to-day affairs and implement a business plan approved by the executive committee.
The Gateway Commercial Venture owns the Five Point Gateway Campus located in Irvine, California and acquired the Five Point Gateway Campus through debt and capital funding. The debt obtained by the Gateway Commercial Venture is non-recourse to the Company other than in the case of customary “bad act” exceptions or bankruptcy or insolvency events.
11
The Company and a related party of the Company separately lease office space at the Five Point Gateway Campus, and during the three months ended March 31, 2020 and 2019, the Gateway Commercial Venture recognized $2.1 million and $2.0 million, respectively, in rental revenues from those leasing arrangements.
The following table summarizes the statements of operations of the Gateway Commercial Venture for the three months ended March 31, 2020 and 2019 (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Rental revenues | $ | 8,476 | $ | 8,380 | |||||||
| Rental operating and other expenses | (1,719) | (1,593) | |||||||||
| Depreciation and amortization | (3,781) | (3,206) | |||||||||
| Interest expense | (3,711) | (4,331) | |||||||||
| Net loss of Gateway Commercial Venture | $ | (735) | $ | (750) | |||||||
| Equity in loss from Gateway Commercial Venture | $ | (551) | $ | (562) | |||||||
The following table summarizes the balance sheet data of the Gateway Commercial Venture and the Company’s investment balance as of March 31, 2020 and December 31, 2019 (in thousands):
| March 31, 2020 | December 31, 2019 | ||||||||||
| Real estate and related intangible assets, net | $ | 449,237 | $ | 451,988 | |||||||
| Other assets | 24,276 | 21,410 | |||||||||
| Total assets | $ | 473,513 | $ | 473,398 | |||||||
| Notes payable, net | $ | 302,784 | $ | 302,344 | |||||||
| Other liabilities | 36,258 | 35,848 | |||||||||
| Members’ capital | 134,471 | 135,206 | |||||||||
| Total liabilities and capital | $ | 473,513 | $ | 473,398 | |||||||
| The Company’s investment in the Gateway Commercial Venture | $ | 100,853 | $ | 101,404 | |||||||
5. NONCONTROLLING INTERESTS
The Holding Company’s wholly owned subsidiary is the managing general partner of the Operating Company. At March 31, 2020, the Holding Company and its wholly owned subsidiary owned approximately 62.5% of the outstanding Class A Common Units and 100% of the outstanding Class B Common Units of the Operating Company. The Holding Company consolidates the financial results of the Operating Company and its subsidiaries and records a noncontrolling interest for the remaining 37.5% of the outstanding Class A Common Units of the Operating Company.
After a 12 month holding period, holders of Class A Common Units of the Operating Company may exchange their units for, at the Company’s option, either (i) Class A common shares on a one-for-one basis (subject to adjustment in the event of share splits, distributions of shares, warrants or share rights, specified extraordinary distributions and similar events), or (ii) cash in an amount equal to the market value of such shares at the time of exchange. Whether such units are acquired by the Company in exchange for Class A common shares or for cash, if the holder also owns Class B common shares, then an equal number of that holder’s Class B common shares will automatically convert into Class A common shares, at a ratio of 0.0003 Class A common shares for each Class B common share. This exchange right is currently exercisable by all holders of outstanding Class A Common Units of the Operating Company.
The terms of the Operating Company's Limited Partnership Agreement (“LPA”) provide for the payment of certain tax distributions to the Operating Company's partners and management partner in an amount equal to the
12
estimated income tax liabilities resulting from taxable income or gain allocated to those parties. The tax distribution provisions in the LPA were included in the Operating Company's governing documents adopted prior to our initial public offering and were designed to provide funds necessary to pay tax liabilities for income that might be allocated, but not paid, to the partners and the management partner. The management partner is an entity controlled by the Company’s Chairman and Chief Executive Officer, Emile Haddad. Consequently, in accordance with the terms of the LPA, a tax distribution payment of $4.6 million was paid to the management partner in January 2020 as a result of taxable income allocated to it in 2018 and estimated to be allocated to it in 2019. The tax distribution made is treated as an advance distribution under the LPA and will be taken into account when determining the amounts otherwise distributable to the management partner under the LPA.
The San Francisco Venture has three classes of units—Class A, Class B and Class C units. The Operating Company owns all of the outstanding Class B units of the San Francisco Venture. All of the outstanding Class A units are owned by affiliates of Lennar Corporation (“Lennar”) and affiliates of Castlelake, LP (“Castlelake”). The Class A units of the San Francisco Venture are intended to be substantially economically equivalent to the Class A Common Units of the Operating Company. The Class A units of the San Francisco Venture represent noncontrolling interests to the Operating Company.
Holders of Class A units of the San Francisco Venture can redeem their units at any time and receive Class A Common Units of the Operating Company on a one-for-one basis (subject to adjustment in the event of share splits, distributions of shares, warrants or share rights, specified extraordinary distributions and similar events). If a holder requests a redemption of Class A units that would result in the Holding Company’s ownership of the Operating Company falling below 50.1%, the Holding Company has the option of satisfying the redemption with Class A common shares instead. The Company also has the option, at any time, to acquire outstanding Class A units of the San Francisco Venture in exchange for Class A Common Units of the Operating Company. The 12 month holding period for any Class A Common Units of the Operating Company issued in exchange for Class A units of the San Francisco Venture is calculated by including the period that such Class A units of the San Francisco Venture were owned. This exchange right is currently exercisable by all holders of outstanding Class A units of the San Francisco Venture.
Concurrent with the termination of the project that was to construct a retail outlet shopping mall in early 2019 (see Note 8), the San Francisco Venture issued 436,498 Class A units (and the Holding Company issued 436,498 of its Class B common shares) to, and received a contribution of $5.5 million from, the holders of Class A units of the San Francisco Venture.
In 2019, the San Francisco Venture issued 25.0 million new Class C units to an affiliate of Lennar in exchange for a contribution of $25.0 million to the San Francisco Venture. Provided that Lennar completes the construction of a certain number of new homes in Candlestick as contemplated under purchase and sale agreements with the Company, the San Francisco Venture is required to redeem the Class C units if and when the Company receives reimbursements from the Mello-Roos communities facilities district formed for the development, in an aggregate amount equal to 50% of any reimbursements up to a maximum amount of $25.0 million. The San Francisco Venture also maintains the ability to redeem the then outstanding balance of Class C units for cash at any time. Upon a liquidation of the San Francisco Venture, the holders of Class C Units are entitled to a liquidation preference in an aggregate amount equal to 50% of the cumulative amount of reimbursements received, less the aggregate amount previously paid to redeem Class C units. The maximum amount payable by the San Francisco Venture pursuant to redemptions or liquidation of the Class C units is $25.0 million. The holders of Class C units are not entitled to receive any other forms of distributions and are not entitled to any voting rights. In connection with the issuance of the Class C units, the San Francisco Venture agreed to spend $25.0 million on the development of infrastructure and/or parking facilities at the Company’s Candlestick development. At March 31, 2020, $25.0 million of Class C units are outstanding and included in redeemable noncontrolling interest on the condensed consolidated balance sheet.
Net (loss) income attributable to the noncontrolling interests on the condensed consolidated statements of operations represents the portion of earnings attributable to the economic interest in the Company held by the noncontrolling interests. The Company allocates (loss) income to noncontrolling interests based on the substantive profit sharing provisions of the applicable operating agreements.
13
With each exchange of Class A Common Units of the Operating Company for Class A common shares, the Holding Company’s percentage ownership interest in the Operating Company and its share of the Operating Company’s cash distributions and profits and losses will increase. Additionally, other issuances of common shares of the Holding Company or common units of the Operating Company results in changes to the noncontrolling interest percentage. As a result, such equity transactions result in an adjustment between members’ capital and the noncontrolling interest in the Company’s consolidated balance sheets and statements of capital to account for the changes in the noncontrolling interest ownership percentage as well as any change in total net assets of the Company.
During the three months ended March 31, 2020 and 2019, the Holding Company increased its ownership interest in the Operating Company as a result of equity transactions related to the Company’s share-based compensation plan.
6. CONSOLIDATED VARIABLE INTEREST ENTITY
The Holding Company conducts all of its operations through the Operating Company, a consolidated VIE, and as a result, substantially all of the Company’s assets and liabilities represent the assets and liabilities of the Operating Company, other than items attributed to income taxes and the payable pursuant to a tax receivable agreement (“TRA”), which was $173.2 million and $172.6 million at March 31, 2020 and December 31, 2019, respectively. The Operating Company has investments in, and consolidates the assets and liabilities of, the San Francisco Venture, FP LP and FPL, all of which have also been determined to be VIEs.
The San Francisco Venture is a VIE as the other members of the venture, individually or as a group, are not able to exercise kick-out rights or substantive participating rights. The Company applied the variable interest model and determined that it is the primary beneficiary of the San Francisco Venture and, accordingly, the San Francisco Venture is consolidated in its results. In making that determination, the Company evaluated that the Operating Company has unilateral and unconditional power to make decisions in regards to the activities that significantly impact the economics of the VIE, which are the development of properties, marketing and sale of properties, acquisition of land and other real estate properties and obtaining land ownership or ground lease for the underlying properties to be developed. The Company is determined to have more-than-insignificant economic benefit from the San Francisco Venture because, excluding Class C units, the Operating Company can prevent or cause the San Francisco Venture from making distributions on its units, and the Operating Company would receive 99% of any such distributions (assuming no distributions had been paid on the Class A Common Units of the Operating Company). In addition, the San Francisco Venture is only allowed to make a capital call on the Operating Company and not any other interest holders, which could be a significant financial risk to the Operating Company.
As of March 31, 2020, the San Francisco Venture had total combined assets of $1,205.8 million, primarily comprised of $1,195.6 million of inventories, $2.2 million in related party assets and $1.3 million in cash and total combined liabilities of $115.3 million including $101.8 million in related party liabilities.
As of December 31, 2019, the San Francisco Venture had total combined assets of $1,197.1 million, primarily comprised of $1,186.2 million of inventories, $2.2 million in related party assets and $1.3 million in cash and total combined liabilities of $119.2 million including $102.4 million in related party liabilities.
Those assets are owned by, and those liabilities are obligations of, the San Francisco Venture, not the Company. The San Francisco Venture’s operating subsidiaries are not guarantors of the Company’s obligations, and the assets held by the San Francisco Venture may only be used as collateral for the San Francisco Venture’s obligations. The creditors of the San Francisco Venture do not have recourse to the assets of the Operating Company, as the VIE’s primary beneficiary, or of the Holding Company.
The Company and other partners do not generally have an obligation to make capital contributions to the San Francisco Venture. In addition, there are no liquidity arrangements or agreements to fund capital or purchase assets that could require the Company to provide financial support to the San Francisco Venture. The Company does not guarantee any debt of the San Francisco Venture. However, the Operating Company has guaranteed the performance of payment by the San Francisco Venture in accordance with the redemption terms of the Class C units of the San Francisco Venture (see Note 5).
14
FP LP and FPL are VIEs because the other partners or members have disproportionately fewer voting rights, and substantially all of the activities of the entities are conducted on behalf of the other partners or members and their related parties. The Operating Company, or a wholly owned subsidiary of the Operating Company, is the primary beneficiary of FP LP and FPL.
As of March 31, 2020, FP LP and FPL had combined assets of $954.6 million, primarily comprised of $763.3 million of inventories, $78.0 million of intangibles, $70.4 million in related party assets and $0.1 million in cash, and total combined liabilities of $129.2 million, including $120.1 million in accounts payable and other liabilities and $9.1 million in related party liabilities.
As of December 31, 2019, FP LP and FPL had combined assets of $900.0 million, primarily comprised of $703.6 million of inventories, $80.4 million of intangibles, $72.3 million in related party assets and $0.5 million in cash, and total combined liabilities of $126.8 million, including $117.6 million in accounts payable and other liabilities and $9.2 million in related party liabilities.
The Company evaluates its primary beneficiary designation on an ongoing basis and assesses the appropriateness of the VIE’s status when events have occurred that would trigger such an analysis. During the three months ended March 31, 2020 and 2019, respectively, there were no VIEs that were deconsolidated.
7. INTANGIBLE ASSET, NET—RELATED PARTY
The intangible asset relates to the contract value of the incentive compensation provisions of the A&R DMA with the Great Park Venture. The intangible asset will be amortized over the contract period based on the pattern in which the economic benefits are expected to be received.
The carrying amount and accumulated amortization of the intangible asset as of March 31, 2020 and December 31, 2019 were as follows (in thousands):
| March 31, 2020 | December 31, 2019 | ||||||||||
| Gross carrying amount | $ | 129,705 | $ | 129,705 | |||||||
| Accumulated amortization | (51,715) | (49,355) | |||||||||
| Net book value | $ | 77,990 | $ | 80,350 | |||||||
Intangible asset amortization expense, as a result of revenue recognition attributable to incentive compensation, was $2.4 million and $4.3 million for the three months ended March 31, 2020 and 2019, respectively. Amortization expense is included in the cost of management services in the accompanying condensed consolidated statements of operations.
15
8. RELATED PARTY TRANSACTIONS
Related party assets and liabilities included in the Company’s condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019 consisted of the following (in thousands):
| March 31, 2020 | December 31, 2019 | ||||||||||
Related Party Assets: | |||||||||||
Contract assets (see Note 3) | $ | 70,462 | $ | 68,133 | |||||||
Operating lease right-of-use asset (see Note 11) | 22,522 | 23,047 | |||||||||
Other | 2,164 | 6,381 | |||||||||
| $ | 95,148 | $ | 97,561 | ||||||||
Related Party Liabilities: | |||||||||||
Reimbursement obligation | $ | 101,823 | $ | 102,403 | |||||||
Payable to holders of Management Company’s Class B interests | 9,000 | 9,000 | |||||||||
Operating lease liability (see Note 11) | 16,024 | 16,282 | |||||||||
Other | 111 | 197 | |||||||||
| $ | 126,958 | $ | 127,882 | ||||||||
Contingent Consideration to Class A Members of the San Francisco Venture
In early 2019, the Company and the members of a joint venture formed between affiliates of The Macerich Company, Lennar and Castlelake, that intended to construct a retail outlet shopping district at Candlestick decided not to proceed with the project. As part of the termination of the project, the San Francisco Venture was released from its obligation to convey parcels of property on which the project was intended to be developed and from certain development obligations. As a result of terminating the project and agreements related thereto, the San Francisco Venture recognized a gain of $64.9 million for the three months ended March 31, 2019, representing the settlement of the contingent consideration pertaining to the development obligations and relief from the conveyance of these parcels.
Indirect Legacy Interest in Great Park Venture
The Company holds an indirect interest in rights to certain Legacy Interests in the Great Park Venture through an equity method investment. In January 2020, the Company received a $1.7 million Legacy Interest distribution from the Great Park Venture. At March 31, 2020 and December 31, 2019, the carrying value of the indirect interest was $0.1 million and $1.8 million, respectively and is included in other related party assets in the table above.
9. NOTES PAYABLE, NET
At March 31, 2020 and December 31, 2019, notes payable consisted of the following (in thousands):
| March 31, 2020 | December 31, 2019 | ||||||||||
7.875% Senior Notes due 2025 | $ | 625,000 | $ | 625,000 | |||||||
Unamortized debt issuance costs and discount | (8,570) | (8,954) | |||||||||
| $ | 616,430 | $ | 616,046 | ||||||||
As of March 31, 2020, no funds have been drawn on the Operating Company’s $125.0 million revolving credit facility. However, letters of credit of $0.3 million are issued and outstanding under the revolving credit facility, thus reducing the available capacity to $124.7 million.
16
10. TAX RECEIVABLE AGREEMENT
The Company is a party to a TRA with all of the holders of Class A Common Units of the Operating Company, all the holders of Class A units of the San Francisco Venture, and prior holders of Class A Common Units of the Operating Company and prior holders of Class A Units of the San Francisco Venture that have exchanged their holdings for Class A common shares (as parties to the TRA, the “TRA Parties”). At March 31, 2020 and December 31, 2019, the Company’s condensed consolidated balance sheets include a liability of $173.2 million and $172.6 million, respectively, for payments expected to be made under certain components of the TRA which the Company deems to be probable and estimable. The Company may record adjustments to TRA liabilities if and when TRA Parties exchange Class A Common Units of the Operating Company for the Company’s Class A common shares or other equity transactions that impact the Holding Company’s ownership in the Operating Company. Changes in the Company’s estimates of the utilization of its deferred tax attributes and tax rates in effect may also result in subsequent adjustments to the amount of TRA liabilities recognized.
The term of the TRA will continue until all such tax benefits under the agreement have been utilized or expired, unless the Company exercises its right to terminate the TRA for an amount based on an agreed value of payments remaining to be made under the agreement. No TRA payments were made during the three months ended March 31, 2020 and 2019.
11. LEASES
The Company’s lessee arrangements consist of agreements to lease certain office facilities and equipment and the Company leases portions of its land to third parties for agriculture or other miscellaneous uses. The Company’s significant agriculture lease agreements are short-term in nature. As of March 31, 2020, all leasing arrangements are classified as operating leases.
The Company’s office leases have remaining lease terms of approximately four years to nine years and include one or more extension options to renew, some of which include options to extend the leases for up to ten years. The Company only includes renewal options in the lease term when it is reasonably certain that it will exercise such options.
The components of lease costs were as follows for the three months ended March 31, 2020 and 2019 (in thousands):
| Three Months Ended March 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Operating lease cost | $ | 554 | $ | 661 | ||||||||||
| Related party operating lease cost | 789 | 784 | ||||||||||||
| Short-term lease cost | 126 | 132 | ||||||||||||
Supplemental balance sheet information related to leases as of March 31, 2020 and December 31, 2019 were as follows (in thousands, except lease term in years and discount rate):
| March 31, 2020 | December 31, 2019 | |||||||||||||
Operating lease right-of-use assets ($22,522 and $23,047 related party, respectively) | $ | 31,520 | $ | 32,579 | ||||||||||
Operating lease liabilities ($16,024 and $16,282 related party, respectively) | $ | 26,433 | $ | 27,206 | ||||||||||
| Weighted average remaining lease term (operating lease) | 6.8 | 7.1 | ||||||||||||
| Weighted average discount rate (operating lease) | 5.9 | % | 5.9 | % | ||||||||||
Operating lease right-of-use assets are included in other assets or related party assets and operating lease liabilities are included in accounts payable and other liabilities or related party liabilities on the condensed consolidated balance sheet.
17
The table below reconciles the undiscounted cash flows to the operating lease liabilities recorded on the condensed consolidated balance sheet as of March 31, 2020 (in thousands):
| Years Ending December 31, | Rental Payments | |||||||
2020 (excluding the three months ended March 31, 2020) | $ | 3,468 | ||||||
2021 | 5,263 | |||||||
2022 | 5,420 | |||||||
2023 | 5,583 | |||||||
2024 | 2,495 | |||||||
2025 | 2,474 | |||||||
Thereafter | 8,096 | |||||||
Total lease payments | $ | 32,799 | ||||||
| Discount | $ | 6,366 | ||||||
| Total operating lease liabilities | $ | 26,433 | ||||||
12. COMMITMENTS AND CONTINGENCIES
The Company is subject to the usual obligations associated with entering into contracts for the purchase, development and sale of real estate, which the Company does in the routine conduct of its business. The operations of the Company are conducted through the Operating Company and its subsidiaries, and in some cases, the Holding Company will guarantee the performance of the Operating Company or its subsidiaries.
Valencia Project Approval Settlement
In September 2017, the Company reached a settlement with key national and state environmental and Native American organizations that were petitioners (the “Settling Petitioners”) in various legal challenges to Valencia’s regulatory approvals and permits. As of March 31, 2020, the Company has a liability balance of $17.7 million associated with certain obligations of the project approval settlement. The Holding Company has provided a guaranty to the Settling Petitioners for monetary payments due from the Company as required under the settlement. As of March 31, 2020, the remaining estimated maximum potential amount of monetary payments subject to the guaranty was $23.9 million with the final payment due in 2026. The Company did not reach a settlement with two local environmental organizations that have pending challenges to certain Valencia project approvals. See “Legal Proceedings” below.
Performance and Completion Bonding Agreements
In the ordinary course of business and as a part of the entitlement and development process, the Company is required to provide performance bonds to ensure completion of certain development obligations. The Company had outstanding performance bonds of $228.1 million and $230.0 million as of March 31, 2020 and December 31, 2019, respectively.
18
Candlestick and The San Francisco Shipyard Disposition and Development Agreement
The San Francisco Venture is a party to a disposition and development agreement with the Successor to the Redevelopment Agency of the City and County of San Francisco (the “San Francisco Agency”) in which the San Francisco Agency has agreed to convey portions of Candlestick and The San Francisco Shipyard to the San Francisco Venture for development. The San Francisco Venture has agreed to reimburse the San Francisco Agency for reasonable costs and expenses actually incurred and paid by the San Francisco Agency in performing its obligations under the disposition and development agreement. The San Francisco Agency can also earn a return of certain profits generated from the development and sale of Candlestick and The San Francisco Shipyard if certain thresholds are met. As of March 31, 2020 the thresholds had not been met.
At each of March 31, 2020 and December 31, 2019, the Company had outstanding guarantees benefiting the San Francisco Agency for infrastructure and construction of certain park and open space obligations with aggregate maximum obligations of $197.8 million.
Letters of Credit
At March 31, 2020 and December 31, 2019, the Company had outstanding letters of credit totaling $1.8 million and $2.4 million, respectively. These letters of credit were issued to secure various development and financial obligations. At each of March 31, 2020 and December 31, 2019, the Company had restricted cash and certificates of deposit of $1.4 million pledged as collateral under certain of the letters of credit agreements.
Legal Proceedings
Landmark Village/Mission Village
During the pendency of certain prior litigation involving the approval of the original environmental impact reports and related permits for the Landmark Village and Mission Village projects at Valencia, in July 2017, the Los Angeles County Board of Supervisors certified the final additional environmental analyses required as a result of a prior California Supreme Court decision regarding the original greenhouse gas analysis related to the projects and reapproved the Landmark Village and Mission Village projects and related permits. In August 2017, two petitioners, Santa Clarita Organization for Planning and the Environment and Friends of the Santa Clara River (collectively, “Non-Settling Petitioners”), who did not participate in a settlement of prior litigation involving the Company and certain other petitioners, filed a new petition for writ of mandate in the Los Angeles Superior Court. The petition challenged Los Angeles County’s July 2017 approvals of the Mission Village and Landmark Village environmental analyses and the two projects based on claims arising under the California Environmental Quality Act and the California Water Code. The Superior Court held a hearing on the merits of the petition in September 2018. In December 2018, the Superior Court issued its written decision denying the Non-Settling Petitioners’ petition for writ of mandate. Thereafter, in January 2019, the Superior Court entered judgment on the petition for writ of mandate in favor of Los Angeles County and the Company. In March 2019, the Non-Settling Petitioners filed an appeal of the Superior Court’s ruling. In April 2020, the Court of Appeal issued a ruling affirming the Superior Court’s judgment in favor of the Company and Los Angeles County.
Hunters Point Litigation
In May 2018, residents of the Bayview Hunters Point neighborhood in San Francisco filed a putative class action in San Francisco Superior Court naming Tetra Tech, Inc. and Tetra Tech EC, Inc., an independent contractor hired by the U.S. Navy to conduct testing and remediation of toxic radiological waste at The San Francisco Shipyard (“Tetra Tech”), Lennar and the Company as defendants. The plaintiffs allege that, among other things, Tetra Tech fraudulently misrepresented its test results and remediation efforts. The plaintiffs are seeking damages against Tetra Tech and have requested an injunction to prevent the Company and Lennar from undertaking any development activities at The San Francisco Shipyard.
Since July 2018, a number of lawsuits have been filed in San Francisco Superior Court on behalf of homeowners in The San Francisco Shipyard, which name Tetra Tech, Lennar, the Company and the Company’s CEO, among others, as defendants. The plaintiffs allege that environmental contamination issues at The San Francisco Shipyard were not properly disclosed to them before they purchased their homes. They also allege that
19
Tetra Tech and other defendants (not including the Company) have created a nuisance at The San Francisco Shipyard under California law. They seek damages as well as certain declaratory relief.
All of these cases have been removed to the U.S. District Court for the Northern District of California. The Company believes that it has meritorious defenses to the allegations in all of these cases and may have insurance and indemnification rights against third parties, including related parties, with respect to these claims. Given the preliminary nature of these claims, the Company cannot predict the outcome of these matters.
Other
Other than the actions outlined above, the Company is also a party to various other claims, legal actions, and complaints arising in the ordinary course of business, the disposition of which, in the Company’s opinion, will not have a material adverse effect on the Company’s consolidated financial statements.
As a significant land owner and developer of unimproved land it is possible that environmental contamination conditions could exist that would require the Company to take corrective action. In the opinion of the Company, such corrective actions, if any, would not have a material adverse effect on the Company’s condensed consolidated financial statements.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the three months ended March 31, 2020 and 2019 were as follows (in thousands):
| 2020 | 2019 | ||||||||||
SUPPLEMENTAL CASH FLOW INFORMATION: | |||||||||||
| Cash paid for interest, all of which was capitalized to inventories | $ | 1,049 | $ | 12,141 | |||||||
| NONCASH INVESTING AND FINANCING ACTIVITIES: | |||||||||||
| Recognition of TRA liability | $ | 615 | $ | 1,696 | |||||||
| Purchase of properties and equipment in accounts payable | $ | 627 | $ | — | |||||||
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows for the three months ended March 31, 2020 and 2019 (in thousands):
| 2020 | 2019 | ||||||||||
Cash and cash equivalents | $ | 247,754 | $ | 373,292 | |||||||
| Restricted cash and certificates of deposit | 1,742 | 1,738 | |||||||||
| Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | 249,496 | $ | 375,030 | |||||||
Amounts included in restricted cash and certificates of deposit represent amounts held as collateral on open letters of credit related to development obligations or because of other contractual obligations of the Company that require the restriction.
14. SEGMENT REPORTING
The Company’s reportable segments consist of:
• Valencia (formerly Newhall)—includes the community of Valencia (formerly known as Newhall Ranch) planned for development in northern Los Angeles County, California. The Valencia segment derives revenues from the sale of residential and commercial land sites to homebuilders, commercial developers and commercial buyers in addition to ancillary operations of operating properties.
20
• San Francisco—includes the Candlestick and The San Francisco Shipyard communities located on bayfront property in the City of San Francisco, California. The San Francisco segment derives revenues from the sale of residential and commercial land sites to homebuilders, commercial developers and commercial buyers in addition to management services provided to affiliates of a related party.
• Great Park—includes the Great Park Neighborhoods being developed adjacent to and around the Orange County Great Park, a metropolitan park under construction in Orange County, California. This segment also includes management services provided by the Management Company to the Great Park Venture, the owner of the Great Park Neighborhoods. As of March 31, 2020, the Company had a 37.5% Percentage Interest in the Great Park Venture and accounted for the investment under the equity method. The reported segment information for the Great Park segment includes the results of 100% of the Great Park Venture at the historical basis of the venture, which did not apply push down accounting at acquisition date. The Great Park segment derives revenues from the sale of residential and commercial land sites to homebuilders, commercial developers and commercial buyers, and management services provided by the Company to the Great Park Venture.
• Commercial—includes Five Point Gateway Campus, an office and research and development campus within the Great Park Neighborhoods, consisting of four newly constructed buildings. Two of the four buildings are leased to one tenant under a 20-year triple net lease which commenced in August 2017. The Company and a subsidiary of Lennar have entered into separate 130-month full service gross leases to occupy a portion of the other two buildings. This segment also includes property management services provided by the Management Company to the Gateway Commercial Venture, the entity that owns the Five Point Gateway Campus. As of March 31, 2020, the Company had a 75% interest in the Gateway Commercial Venture and accounted for the investment under the equity method. The reported segment information for the Commercial segment includes the results of 100% of the Gateway Commercial Venture.
Segment operating results and reconciliations to the Company’s consolidated balances are as follows (in thousands):
| Revenues | Profit (Loss) | ||||||||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Valencia | $ | 796 | $ | 1,615 | $ | (4,794) | $ | (4,084) | |||||||||||||||
San Francisco | 975 | 1,093 | (3,092) | 61,074 | |||||||||||||||||||
Great Park | 29,528 | 169,559 | (2,542) | 40,268 | |||||||||||||||||||
Commercial | 8,573 | 8,349 | (638) | (781) | |||||||||||||||||||
Total reportable segments | $ | 39,872 | 180,616 | (11,066) | 96,477 | ||||||||||||||||||
Reconciling items: | |||||||||||||||||||||||
| Removal of results of unconsolidated entities— | |||||||||||||||||||||||
Great Park Venture (1) | (22,176) | (159,163) | 4,318 | (37,111) | |||||||||||||||||||
Gateway Commercial Venture (1) | (8,476) | (8,380) | 735 | 750 | |||||||||||||||||||
| Add equity in earnings (losses) from unconsolidated entities— | |||||||||||||||||||||||
Great Park Venture | — | — | (30,360) | 9,444 | |||||||||||||||||||
Gateway Commercial Venture | — | — | (551) | (562) | |||||||||||||||||||
Corporate and unallocated (2) | — | — | (16,295) | (16,265) | |||||||||||||||||||
Total consolidated balances | $ | 9,220 | $ | 13,073 | $ | (53,219) | $ | 52,733 | |||||||||||||||
(1) Represents the removal of the Great Park Venture’s and Gateway Commercial Venture’s operating results that are included in the Great Park segment and Commercial segment operating results, respectively, but are not included in the Company’s consolidated results.
(2) Corporate and unallocated activity is primarily comprised of corporate general, and administrative expenses.
21
Segment assets and reconciliations to the Company’s consolidated balances are as follows (in thousands):
| March 31, 2020 | December 31, 2019 | ||||||||||
Valencia | $ | 806,855 | $ | 748,082 | |||||||
San Francisco | 1,205,828 | 1,197,081 | |||||||||
Great Park | 1,265,509 | 1,356,417 | |||||||||
Commercial | 473,545 | 473,409 | |||||||||
Total reportable segments | $ | 3,751,737 | 3,774,989 | ||||||||
Reconciling items: | |||||||||||
Removal of unconsolidated balances of Great Park Venture (1) | (1,106,019) | (1,196,258) | |||||||||
Removal of unconsolidated balances of Gateway Commercial Venture (1) | (473,513) | (473,398) | |||||||||
Other eliminations (2) | (11,794) | (8,310) | |||||||||
Add investment balance in Great Park Venture | 401,056 | 431,835 | |||||||||
Add investment balance in Gateway Commercial Venture | 100,853 | 101,404 | |||||||||
Corporate and unallocated (3) | 275,103 | 374,438 | |||||||||
Total consolidated balances | $ | 2,937,423 | $ | 3,004,700 | |||||||
(1) Represents the removal of the Great Park Venture’s and Gateway Commercial Venture’s balances that are included in the Great Park segment and Commercial segment balances, respectively, but are not included in the Company’s consolidated balances.
(2) Represents intersegment balances that eliminate in consolidation.
(3) Corporate and unallocated assets consist of cash and cash equivalents, receivables, right-of-use assets and prepaid expenses.
15. SHARE-BASED COMPENSATION
The Company has an incentive award plan pursuant to which the Company has granted restricted share units (“RSUs”) and restricted share awards either fully vested, with service conditions or with service and market performance conditions based on the market price of the Company’s Class A common shares. Awards with a service condition generally vest over a three-year period or in the case of non-employee directors over one year. Awards with a service and market performance condition generally vest at the end of a three-year period. Restricted share awards entitle the holders to non-forfeitable distributions and to vote the underlying Class A common share during the restricted period. As of March 31, 2020, there were 4,678,600 remaining Class A common shares available for future issuance under the Incentive Award Plan.
The Company estimates the fair value of restricted share awards with a service condition based on the closing market price of the Company’s Class A common shares on the award’s grant date. The grant date fair value of awards with a market condition are determined using a Monte-Carlo approach.
In January 2020, the Company reacquired vested RSUs and restricted Class A common shares for $5.5 million for the purpose of settling tax withholding obligations of employees. The reacquisition cost is based on the fair value of the Company’s Class A common shares on the date the tax obligation is incurred.
22
The following table summarizes share-based equity compensation activity for the three months ended March 31, 2020:
| Share-Based Awards (in thousands) | Weighted- Average Grant Date Fair Value | ||||||||||
Nonvested at January 1, 2020 | 3,011 | $ | 9.02 | ||||||||
Granted | 677 | $ | 8.09 | ||||||||
Forfeited | (302) | $ | 6.82 | ||||||||
Vested | (1,056) | $ | 12.70 | ||||||||
Nonvested at March 31, 2020 | 2,330 | $ | 7.37 | ||||||||
Share-based compensation expense was $3.0 million and $3.3 million for the three months ended March 31, 2020 and 2019, respectively. Share-based compensation expense is included in selling, general, and administrative expenses in the accompanying condensed consolidated statements of operations. Approximately $14.6 million of total unrecognized compensation cost related to non-vested awards is expected to be recognized over a weighted–average period of 1.8 years from March 31, 2020. The estimated fair value at vesting of share-based awards that vested during the three months ended March 31, 2020 was $8.5 million.
16. EMPLOYEE BENEFIT PLANS
The Newhall Land and Farming Company Retirement Plan (the “Retirement Plan”) is a defined benefit plan that is funded by the Company and qualified under the Employee Retirement Income Security Act. In 2004, the Retirement Plan was amended to cease future benefit accruals and the Retirement Plan was frozen. The Company’s funding policy is to contribute amounts sufficient to meet minimum requirements but not more than the maximum tax-deductible amount. The Company expects to contribute $0.6 million to the Retirement Plan in 2020 and did not make any contributions during the three months ended March 31, 2020.
The components of net periodic benefit for the three months ended March 31, 2020 and 2019, are as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
Net periodic benefit: | |||||||||||
Interest cost | $ | 164 | $ | 208 | |||||||
Expected return on plan assets | (276) | (253) | |||||||||
Amortization of net actuarial loss | 24 | 35 | |||||||||
Net periodic benefit | $ | (88) | $ | (10) | |||||||
Net periodic benefit does not include a service cost component as a result of the Retirement Plan being frozen. All other components of net periodic benefit are included in other income on the condensed consolidated statements of operations.
17. INCOME TAXES
The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes, which requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statements and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for the years in which taxes are expected to be paid or recovered.
Upon formation, the Holding Company elected to be treated as a corporation for U.S. federal, state, and local tax purposes. All operations are carried on through the Holding Company’s subsidiaries, the majority of which are pass-through entities that are generally not subject to federal or state income taxation, as all of the taxable
23
income, gains, losses, deductions, and credits are passed through to the partners. The Holding Company is responsible for income taxes on its share of taxable income or loss passed through from the operating subsidiaries.
In the three months ended March 31, 2020, the Company recorded no provision or benefit for income taxes (after application of an increase in the Company’s valuation allowance) on pre-tax loss of $53.2 million. In the three months ended March 31, 2019, the Company recorded a $1.3 million provision for income taxes (after application of a decrease in the Company’s valuation allowance) on pre-tax income of $54.0 million. The effective tax rates for the three months ended March 31, 2020 and 2019, differ from the 21% federal statutory rate and applicable state statutory rates primarily due to the Company’s valuation allowance on its book losses and to the pre-tax portion of income and losses that are passed through to the other partners of the Operating Company and the San Francisco Venture. The Company’s tax provision for the three months ended March 31, 2019 relates to adjustments to the Company’s valuation allowance resulting from the limitation on post-2017 net operating losses to offset only 80% of deferred tax liabilities which was treated as a discrete event.
Each quarter the Company assesses its deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable under the guidance of ASC Topic 740, Income Taxes. The Company is required to establish a valuation allowance for any portion of the asset it concludes is more likely than not unrealizable. The Company’s assessment considers, among other things, the nature, frequency and severity of prior cumulative losses, forecasts of future taxable income, the duration of statutory carryforward periods, its utilization experience with operating loss and tax credit carryforwards and tax planning alternatives, to the extent these items are applicable. Largely due to a history of book losses, the Company has recorded a valuation allowance against its federal and state net deferred tax assets.
The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. Fiscal years 2015 through 2018 generally remain subject to examination by federal and state tax authorities. The Company is not currently under examination by any tax authority. The Company classifies any interest and penalties related to income taxes assessed by jurisdiction as part of income tax expense. The Company has concluded that there were no significant uncertain tax positions requiring recognition in its financial statements, nor has the Company been assessed interest or penalties by any major tax jurisdictions related to any open tax periods. The Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law on March 27, 2020. The CARES Act includes various income and payroll tax provisions that the Company is in the process of analyzing to determine the financial impact on its condensed consolidated financial statements. The Company is taking advantage of some of the payroll tax deferrals provided in the CARES Act. The Company does not believe that any other aspects of the CARES Act are material to the tax provision during the quarter.
18. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS AND DISCLOSURES
ASC Topic 820, Fair Values Measurement, emphasizes that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. The following hierarchy classifies the inputs used to determine fair value into three levels:
Level 1—Quoted prices for identical instruments in active markets
Level 2—Quoted prices for similar instruments in active markets or inputs, other than quoted prices, that are observable for the instrument either directly or indirectly
Level 3—Significant inputs to the valuation model are unobservable
At each reporting period, the Company evaluates the fair value of its financial instruments. Other than notes payable, net, the carrying amount of the Company’s financial instruments, which includes cash and cash equivalents, restricted cash and certificates of deposit, certain related party assets and liabilities, and accounts payable and other liabilities, approximated the Company’s estimates of fair value at both March 31, 2020 and December 31, 2019. The fair value of the Company’s notes payable, net, are estimated based on quoted market prices (level 2). At March 31, 2020, the estimated fair value of notes payable, net was $533.8 million compared to a carrying value of $616.4
24
million. At December 31, 2019, the estimated fair value of notes payable, net was $631.1 million compared to a carrying value of $616.0 million. During the three months ended March 31, 2020 and 2019, the Company had no assets that were measured at fair value on a nonrecurring basis, other than the Company’s investment in the Great Park Venture (see Note 4).
19. EARNINGS PER SHARE
The Company uses the two-class method in its computation of earnings per share. Pursuant to the terms of the Holding Company’s Second Amended and Restated Limited Liability Company Agreement, the Class A common shares and the Class B common shares are entitled to receive distributions at different rates, with each Class B common share receiving 0.03% of the distributions paid on each Class A common share. Under the two-class method, the Company’s net income available to common shareholders is allocated between the two classes of common shares on a fully-distributed basis and reflects residual net income after amounts attributed to noncontrolling interests. In the event of a net loss, the Company determined that both classes share in the Company’s losses, and they share in the losses using the same mechanism as the distributions. The Company also has restricted share awards and performance restricted share awards (see Note 15) that have a right to non-forfeitable dividends while unvested and are contemplated as participating when the Company is in a net income position. These awards participate in distributions on a basis equivalent to other Class A common shares but do not participate in losses.
No distributions were declared for the three months ended March 31, 2020 and 2019. The Company operated in a net loss and net income position for the three months ended March 31, 2020 and 2019, respectively. As a result, net (loss) income attributable to the parent was allocated to the Class A common shares and Class B common shares in an amount per Class B common share equal to 0.03% multiplied by the amount per Class A common share. Basic (loss) income per Class A common share is determined by dividing net (loss) income allocated to Class A Common shareholders by the weighted average number of Class A common shares outstanding for the period. Basic (loss) income per Class B common share is determined by dividing net (loss) income allocated to the Class B common shares by the weighted average number of Class B common shares outstanding during the period.
Diluted (loss) income per share calculations for both Class A common shares and Class B common shares contemplate adjustments to the numerator and the denominator under the if-converted method for the convertible Class B common shares, the exchangeable Class A units of the San Francisco Venture and the exchangeable Class A Common Units of the Operating Company. The Company uses the treasury stock method or the two-class method when evaluating dilution for RSUs, restricted shares, and performance restricted shares. The more dilutive of the two methods is included in the calculation for diluted (loss) income per share.
25
The following table summarizes the basic and diluted earnings per share calculations for the three months ended March 31, 2020 and 2019 (in thousands, except shares and per share amounts):
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
Numerator: | |||||||||||
Net (loss) income attributable to the Company | $ | (24,806) | $ | 23,808 | |||||||
Adjustments to net (loss) income attributable to the Company | 487 | 107 | |||||||||
Net (loss) income attributable to common shareholders | $ | (24,319) | $ | 23,915 | |||||||
Numerator—basic common shares: | |||||||||||
Net (loss) income attributable to common shareholders | $ | (24,319) | $ | 23,915 | |||||||
Less: net income allocated to participating securities | $ | — | $ | 986 | |||||||
Allocation of net income (loss) among common shareholders | $ | (24,319) | $ | 22,929 | |||||||
Numerator for basic net (loss) income available to Class A common shareholders | $ | (24,311) | $ | 22,921 | |||||||
Numerator for basic net (loss) income available to Class B common shareholders | $ | (8) | $ | 8 | |||||||
Numerator—diluted common shares: | |||||||||||
Net (loss) income attributable to common shareholders | $ | (24,319) | $ | 23,915 | |||||||
Reallocation of (loss) income to Company upon assumed exchange of units | $ | (954) | $ | 27,289 | |||||||
Less: net income allocated to participating securities | $ | — | $ | 985 | |||||||
Allocation of net income (loss) among common shareholders | $ | (25,273) | $ | 50,219 | |||||||
Numerator for diluted net (loss) income available to Class A common shareholders | $ | (25,265) | $ | 50,211 | |||||||
Numerator for diluted net (loss) income available to Class B common shareholders | $ | (8) | $ | 8 | |||||||
Denominator: | |||||||||||
Basic weighted average Class A common shares outstanding | 66,649,866 | 66,210,916 | |||||||||
Diluted weighted average Class A common shares outstanding | 68,792,585 | 145,296,469 | |||||||||
Basic weighted average Class B common shares outstanding | 79,233,544 | 79,061,835 | |||||||||
Diluted weighted average Class B common shares outstanding | 79,233,544 | 79,275,234 | |||||||||
Basic (loss) income per share: | |||||||||||
Class A common shares | $ | (0.36) | $ | 0.35 | |||||||
Class B common shares | $ | (0.00) | $ | 0.00 | |||||||
Diluted (loss) income per share: | |||||||||||
Class A common shares | $ | (0.37) | $ | 0.35 | |||||||
Class B common shares | $ | (0.00) | $ | 0.00 | |||||||
Anti-dilutive potential RSUs | — | 36,289 | |||||||||
Anti-dilutive potential Performance RSUs | 338,813 | 388,155 | |||||||||
Anti-dilutive potential Restricted Shares (weighted average) | 1,876,808 | — | |||||||||
Anti-dilutive potential Performance Restricted Shares (weighted average) | 749,201 | — | |||||||||
Anti-dilutive potential Class A common shares (weighted average) | 76,120,179 | — | |||||||||
Anti-dilutive potential Class B common shares (weighted average) | — | — | |||||||||
26
20. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss attributable to the Company consists of unamortized defined benefit pension plan net actuarial losses that totaled $2.7 million at both March 31, 2020 and December 31, 2019, net of tax benefits of $0.8 million and $0.8 million, respectively. At both March 31, 2020 and December 31, 2019, the Company held a full valuation allowance related to the accumulated tax benefits. Accumulated other comprehensive loss of $1.6 million and $1.6 million is included in noncontrolling interests at March 31, 2020 and December 31, 2019, respectively. Net actuarial gains or losses are re-determined annually or upon remeasurement events and principally arise from changes in the rate used to discount benefit obligations and differences between expected and actual returns on plan assets. Reclassifications from accumulated other comprehensive loss to net loss related to amortization of net actuarial losses were approximately $15,000 and $22,000, net of taxes, for the three months ended March 31, 2020 and 2019, respectively, and are included in other miscellaneous income in the accompanying condensed consolidated statements of operations.
27
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read in conjunction with our condensed consolidated financial statements and related notes included under Part I, Item 1 of this report and our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. “Us,” “we,” and “our” refer to Five Point Holdings, LLC, together with its consolidated subsidiaries. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as supplemented by Part II, Item 1A in this quarterly report. Actual results could differ materially from those set forth in any forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements.”
Overview
We conduct all of our business in or through our operating company, Five Point Operating Company, LP (the “operating company”). We are, through a wholly owned subsidiary, the sole managing general partner and owned, as of March 31, 2020, approximately 62.5% of the operating company. The operating company directly or indirectly owns equity interests in:
•Five Point Land, LLC (“FPL”), which owns The Newhall Land & Farming Company, a California limited partnership, the entity that is developing Valencia (formerly known as Newhall Ranch), our community in northern Los Angeles County, California;
•The Shipyard Communities, LLC (the “San Francisco Venture”), which is developing Candlestick and The San Francisco Shipyard, our communities in the City of San Francisco, California;
•Heritage Fields LLC (the “Great Park Venture”), which is developing Great Park Neighborhoods, our community in Orange County, California;
•Five Point Communities, LP and Five Point Communities Management, Inc. (together, the “management company”), which have historically managed the development of Great Park Neighborhoods and Valencia; and
•Five Point Office Venture Holdings I, LLC (the “Gateway Commercial Venture”), which owns the Five Point Gateway Campus, our commercial office campus located within the Great Park Neighborhoods.
The operating company consolidates and controls the management of all of these entities except for the Great Park Venture and the Gateway Commercial Venture. The operating company owns a 37.5% percentage interest in the Great Park Venture and a 75% interest in the Gateway Commercial Venture and accounts for its interest in both using the equity method. The management company performs development management services for the Great Park Venture and property management services for the Gateway Commercial Venture.
28
Operational Highlights
In response to the coronavirus (COVID-19) pandemic, we have taken immediate steps to protect the health and well-being of our associates and to preserve the financial strength of the Company. Beginning on March 16, 2020, all of our associates started working remotely with access to necessary systems and resources to ensure business continuity. Our executive team has been focused on analyzing the impact of projected revenues being pushed back by either three, six or nine months and then assessing which variable expenditures should be deferred, accordingly. We immediately implemented the first three-month delay and have limited development activities at our communities to only those activities essential to supporting active homebuilding by builders. As we monitor developments related to COVID-19, along with sales rates in our communities, mortgage lending metrics and unemployment rates, we will decide whether there is a need to further implement a six- or nine-month delay. Although California and other states across the nation are planning for how stay-at-home orders and other social interaction restrictions will be eased, the timing, extent and possibility of reversing such actions is unknown.
At the end of March 2020, the Great Park Venture closed the second take down of a two-take purchase and sale agreement. The first take down closed in 2019. The gross proceeds in the first quarter of 2020 were $20.3 million representing the base purchase price for land entitled for 35 homesites. Another 38 homesites remain under contract with a builder, and we currently anticipate the sale will close in the second half of 2020. In April 2020, our information centers and builder sales operations shifted to a mostly virtual process. At Valencia, it is too early to know if the effects of COVID-19 related factors will impact the timeline of the grand opening of our first neighborhoods in Mission Village and the first builder home sales to home buyers. We have paused most of our development activities at Valencia, except to support active homebuilding by builders. In San Francisco, our focus has not significantly shifted as we work to refine the design of Candlestick and seek the right partner to bring that community out of the ground.
29
Results of Operations
The timing of our land sale revenues is influenced by several factors, including the sequencing of the planning and development process and market conditions at our communities. As a result, we have historically experienced, and expect to continue to experience, variability in results of operations between comparable periods.
The following table summarizes our consolidated historical results of operations for the three months ended March 31, 2020 and 2019.
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (in thousands) | |||||||||||
Statement of Operations Data | |||||||||||
Revenues | |||||||||||
Land sales | $ | 6 | $ | 55 | |||||||
Land sales—related party | 10 | 230 | |||||||||
Management services—related party | 8,244 | 11,063 | |||||||||
Operating properties | 960 | 1,725 | |||||||||
Total revenues | 9,220 | 13,073 | |||||||||
Costs and expenses | |||||||||||
Land sales | — | — | |||||||||
Management services | 6,051 | 7,616 | |||||||||
Operating properties | 1,945 | 1,901 | |||||||||
Selling, general, and administrative | 24,626 | 25,773 | |||||||||
Total costs and expenses | 32,622 | 35,290 | |||||||||
Other income | |||||||||||
Interest income | 1,006 | 2,454 | |||||||||
Gain on settlement of contingent consideration—related party | — | 64,870 | |||||||||
Miscellaneous | 88 | 10 | |||||||||
Total other income | 1,094 | 67,334 | |||||||||
Equity in (loss) earnings from unconsolidated entities | (30,911) | 8,882 | |||||||||
(Loss) income before income tax (provision) benefit | (53,219) | 53,999 | |||||||||
Income tax (provision) benefit | — | (1,266) | |||||||||
Net (loss) income | (53,219) | 52,733 | |||||||||
Less net (loss) income attributable to noncontrolling interests | (28,413) | 28,925 | |||||||||
Net (loss) income attributable to the company | $ | (24,806) | $ | 23,808 | |||||||
Three Months Ended March 31, 2020 and 2019
Revenues. Revenues decreased by $3.9 million, or 29.5%, to $9.2 million for the three months ended March 31, 2020, from $13.1 million for the three months ended March 31, 2019. We had no land sales during the three months ended March 31, 2020 and March 31, 2019, with most of our revenues being recognized from related party management services at our Great Park segment.
Cost of management services. Cost of management services decreased by $1.6 million, or 20.5%, to $6.1 million for the three months ended March 31, 2020, from $7.6 million for the three months ended March 31, 2019. The decrease was primarily due to intangible asset amortization expense at our Great Park segment.
30
Selling, general, and administrative. Selling, general, and administrative expenses decreased by $1.1 million, or 4.5%, to $24.6 million for the three months ended March 31, 2020, from $25.8 million for the three months ended March 31, 2019. The decrease was mainly attributable to a decrease in employee related expenses at our San Francisco segment.
Equity in (loss) earnings from unconsolidated entities. Equity in loss from unconsolidated entities decreased to $30.9 million for the three months ended March 31, 2020, from earnings of $8.9 million for the three months ended March 31, 2019. The decrease was primarily due to variability in land sale activity at our Great Park segment during the three months ended March 31, 2020 compared to the same period in 2019 in addition to the recognition of an other-than-temporary impairment of $26.9 million attributed to our investment in the Great Park Venture. The impairment was primarily a result of expected delays in both the timing of land sales to builders and distributions to us causing a decline in the fair value of our investment in the Great Park Venture. In determining that the impairment was other-than-temporary, we concluded that it was uncertain if a near term recovery of value that was lost as a result of delays to expected land sales from the impacts of the COVID-19 pandemic would occur. See Note 4 to our condensed consolidated financial statements included under Part I, Item 1 of this report.
Income taxes. Pre-tax losses of $53.2 million for the three months ended March 31, 2020 resulted in no tax provision or benefit (after application of an increase in the Company’s valuation allowance of $6.3 million). We assessed the realization of the net deferred tax asset and the need for a valuation allowance and determined that at March 31, 2020, it is more likely than not that the net deferred tax asset is not realizable and results in a net deferred tax liability after application of the valuation allowance. Pre-tax income for the three months ended March 31, 2019 of $54.0 million resulted in a tax provision of $1.3 million. The tax provision was the result of an $8.6 million increase to our deferred tax liability offset by a decrease in our deferred tax asset valuation allowance of $7.3 million. Our effective tax rate, before changes in valuation allowance, increased for the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to a slight decrease in the ownership percentage of our noncontrolling interests.
Segment Results and Financial Information
Our four reportable operating segments are Valencia (formerly Newhall), San Francisco, Great Park and Commercial:
•Our Valencia segment includes operating results for the Valencia community and agricultural operations in Los Angeles and Ventura Counties, California.
•Our San Francisco segment includes operating results for the Candlestick and The San Francisco Shipyard communities, as well as results attributable to the development management services that we provided to affiliates of Lennar Corporation (“Lennar”) in the San Francisco Bay Area. The management agreement with respect to the Concord community was terminated in early 2020.
•Our Great Park segment includes operating results for the Great Park Neighborhoods community and development management services provided by the management company for the Great Park Venture.
•Our Commercial segment includes the operating results of the Five Point Gateway Campus and property management services provided by the management company for the Gateway Commercial Venture.
Valencia Segment (formerly Newhall)
Our Valencia property (formerly known as Newhall Ranch) consists of approximately 15,000 acres in northern Los Angeles County and is designed to include approximately 21,500 homesites and approximately 11.5 million square feet of commercial space. Valencia is the continuation of our master-planned community where
31
already today approximately 20,000 households reside and approximately 60,000 people work. In 2019, we entered into purchase and sale agreements to sell 781 homesites in the first development area at the community, known as Mission Village. We closed on 711 of the homesites in 2019 and the balance of homesites is anticipated to close in the first half of 2020. Mission Village is approved for up to 4,055 homesites and approximately 1.6 million square feet of commercial development.
The following table summarizes the results of operations of our Valencia segment for the three months ended March 31, 2020 and 2019.
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (in thousands) | |||||||||||
Statement of Operations Data | |||||||||||
Revenues | |||||||||||
Land sales | $ | 6 | $ | 55 | |||||||
Land sales—related party | 10 | 9 | |||||||||
Operating properties | 780 | 1,551 | |||||||||
Total revenues | 796 | 1,615 | |||||||||
Costs and expenses | |||||||||||
Operating properties | 1,945 | 1,901 | |||||||||
Selling, general, and administrative | 3,733 | 3,809 | |||||||||
Total costs and expenses | 5,678 | 5,710 | |||||||||
| Other income | 88 | 11 | |||||||||
Segment loss | $ | (4,794) | $ | (4,084) | |||||||
Three Months Ended March 31, 2020 and 2019
Operating properties. Revenues from operating properties decreased by $0.8 million, or 49.7%, to $0.8 million for the three months ended March 31, 2020, from $1.6 million for the three months ended March 31, 2019. The decrease was mainly attributable to lower market prices and sales for certain citrus crops.
San Francisco Segment
Located almost equidistant between downtown San Francisco and the San Francisco International Airport, Candlestick and The San Francisco Shipyard consist of approximately 800 acres of bayfront property in the City of San Francisco. Candlestick and The San Francisco Shipyard are designed to include approximately 12,000 homesites and approximately 6.3 million square feet of commercial space.
32
On May 2, 2016, the San Francisco Venture transferred to a joint venture (“CPHP”) between an affiliate of Lennar and an affiliate of Castlelake L.P. (“Castlelake”) certain assets and liabilities of the San Francisco Venture, including property within The San Francisco Shipyard known as the Phase 1 Land (the “Separation Transaction”). CPHP is responsible for current and future residential construction on the Phase 1 Land. We are not entitled to any of the proceeds from future sales of homes on the Phase 1 Land. CPHP was also transferred the ownership interest in a joint venture (the “Mall Venture”) formed with affiliates of The Macerich Company (“Macerich”) that intended to construct an urban retail outlet shopping district (the “Retail Project”) at Candlestick. Following the Separation Transaction, we were obligated to complete certain development activities and convey the parcels of property to the Mall Venture upon which the Retail Project was to be developed. In early 2019, following discussions with the members of the Mall Venture, we and the members of the Mall Venture decided not to proceed with the Retail Project. As part of the termination of the Retail Project, we were released from our obligation to convey parcels of property on which the Retail Project was intended to be developed by the Mall Venture. We were also released from certain development obligations. As a result of the termination of the Retail Project, we recognized a gain of $64.9 million, representing the settlement of the contingent consideration pertaining to the development obligations and relief from the conveyance of these parcels. Additionally, we repaid Macerich a $65.1 million obligation related to a promissory note in the same amount, plus $11.1 million of accrued interest associated with the promissory note. The San Francisco Venture also issued an aggregate of 436,498 of its Class A Units (while we concurrently issued 436,498 of our Class B common shares) to affiliates of Lennar and Castlelake and concurrently received a contribution of $5.5 million from affiliates of Lennar and Castlelake.
In October 2019, we received approval from the City of San Francisco on a revised development plan for the first phase of Candlestick that is currently planned to include approximately 750,000 square feet of office space, 1,600 homes, and 300,000 square feet of lifestyle amenities centered around retail and entertainment. As currently planned, Candlestick ultimately is expected to include approximately 7,000 homes.
Our development at Candlestick and The San Francisco Shipyard is not subject San Francisco’s Proposition M growth control measure, which imposes annual limitations on office development and is applicable to all other developers with projects in the city. This means the full amount of permitted commercial square footage at Candlestick and The San Francisco Shipyard can be constructed as we determine, including all at once, even though Proposition M may delay new office developments elsewhere in San Francisco. In 2018, our disposition and development agreement with the City of San Francisco was amended to increase the total amount of commercial use at Candlestick and The San Francisco Shipyard by over two million square feet, most of which we anticipate will be for office use, and increases our total commercial space to approximately 6.3 million square feet.
33
At The San Francisco Shipyard, approximately 408 acres are still owned by the U.S. Navy and will not be conveyed to us until the U.S. Navy satisfactorily completes its finding of suitability to transfer, or “FOST,” process, which involves multiple levels of environmental and governmental investigation, analysis, review, comment and approval. Based on our discussions with the U.S. Navy, we had previously expected the U.S. Navy to deliver this property between 2019 and 2022. However, allegations that Tetra Tech, Inc. and Tetra Tech EC, Inc (collectively, “Tetra Tech”), a contractor hired by the U.S. Navy, misrepresented sampling results at The San Francisco Shipyard have resulted in data reevaluation, governmental investigations, criminal proceedings, lawsuits, and a determination by the U.S. Navy and other regulatory agencies to undertake additional sampling. As part of the 2018 Congressional spending bill, the U.S. Department of Defense allocated $36.0 million to help fund resampling efforts at The San Francisco Shipyard. An additional $60.4 million to fund resampling efforts was approved as part of a 2019 military construction spending bill. These activities have delayed the remaining land transfers from the U.S. Navy and could lead to additional legal claims or government investigations, all of which could in turn further delay or impede our future development of such parcels. Our development plans were designed with the flexibility to adjust for potential land transfer delays, and we have the ability to shift the phasing of our development activities to account for potential delays caused by U.S. Navy retesting, but there can be no assurance that these matters and other related matters that may arise in the future will not materially impact our development plans.
We have been, and may in the future be, named as a defendant in lawsuits seeking damages and other relief arising out of alleged contamination at The San Francisco Shipyard and Tetra Tech’s alleged misrepresentations of related sampling work. See Note 12 to our condensed consolidated financial statements included under Part I, Item 1 of this report. Given the preliminary nature of the claims to date, we cannot predict the outcome of these matters.
The following table summarizes the results of operations of our San Francisco segment for the three months ended March 31, 2020 and 2019.
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (in thousands) | |||||||||||
Statement of Operations Data | |||||||||||
Revenues | |||||||||||
Land sales—related party | $ | — | $ | 221 | |||||||
Operating property | 180 | 174 | |||||||||
Management services—related party | 795 | 698 | |||||||||
Total revenues | 975 | 1,093 | |||||||||
Costs and expenses | |||||||||||
Management services | 475 | 377 | |||||||||
Selling, general, and administrative | 3,592 | 4,512 | |||||||||
Total costs and expenses | 4,067 | 4,889 | |||||||||
| Other income—gain on settlement of contingent consideration, related party | — | 64,870 | |||||||||
Segment (loss) income | $ | (3,092) | $ | 61,074 | |||||||
Three Months Ended March 31, 2020 and 2019
Selling, general, and administrative. Selling, general, and administrative expenses decreased by $0.9 million, or 20.4%, to $3.6 million for the three months ended March 31, 2020, from $4.5 million for the three months ended March 31, 2019. The decrease was mainly attributable to a decrease in employee related expenses.
34
Other Income. In early 2019, we and the members of the Mall Venture determined not to proceed with the Retail Project, and we were released from obligations to convey parcels of property on which the Retail Project was intended to be developed by the Mall Venture. As a result of the relief of these obligations, we recognized a gain of $64.9 million during the three months ended March 31, 2019.
Great Park Segment
We have a 37.5% percentage interest in the Great Park Venture, and we account for our investment using the equity method of accounting. We have a controlling interest in the management company, an entity which performs development management services at Great Park Neighborhoods. We do not include the Great Park Venture as a consolidated subsidiary in our consolidated financial statements. However, because of the relationship between the management company and the Great Park Venture, we assess our investment in the Great Park Venture based on the financial information for the Great Park Venture in its entirety, and not just our equity interest in it. As a result, our Great Park segment consists of the operations of both the Great Park Venture and the development management services provided by the management company at the Great Park Venture.
Great Park Neighborhoods consists of approximately 2,100 acres in Orange County and is being built around the approximately 1,300 acre Orange County Great Park, a metropolitan public park that is under construction. Great Park Neighborhoods is designed to include approximately 10,500 homesites and approximately 4.9 million square feet of commercial space.
Interests in the Great Park Venture are either “percentage interests” or “legacy interests.” Holders of the legacy interests are entitled to receive priority distributions in an amount up to $565.0 million, and holders of percentage interests are entitled to all other distributions. In early 2020, the Great Park Venture made a distribution of $76.3 million to the holders of legacy interests, reducing the remaining aggregate distributions to the holders of legacy interests to approximately $134.0 million. Of the remaining $134.0 million, the first $45.0 million will be paid to the holders of legacy interests prior to the commencement of distributions to the holders of percentage interests. See Note 4 to our condensed consolidated financial statements included under Part I, Item 1 of this report for additional discussion of distribution priorities at the Great Park Venture.
35
The following table summarizes the results of operations of our Great Park segment for the three months ended March 31, 2020 and 2019.
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (in thousands) | |||||||||||
Statement of Operations Data | |||||||||||
Revenues | |||||||||||
Land sales | $ | 21,475 | $ | 31,466 | |||||||
Land sales—related party | 701 | 127,697 | |||||||||
Management services—related party | 7,352 | 10,396 | |||||||||
Total revenues | 29,528 | 169,559 | |||||||||
Costs and expenses | |||||||||||
Land sales | 15,304 | 107,819 | |||||||||
Management services | 5,576 | 7,239 | |||||||||
Selling, general, and administrative | 11,948 | 6,575 | |||||||||
Management fees—related party | 153 | 8,217 | |||||||||
Total costs and expenses | 32,981 | 129,850 | |||||||||
Interest income | 911 | 559 | |||||||||
Segment (loss) income | $ | (2,542) | $ | 40,268 | |||||||
Three Months Ended March 31, 2020 and 2019
Revenues. Revenues decreased by $140.0 million to $29.5 million for the three months ended March 31, 2020, from $169.6 million for the three months ended March 31, 2019. The decrease was primarily attributable to the recognition of revenue from the sale of land entitled for an aggregate of 35 homesites on approximately four acres during the three months ended March 31, 2020 compared to the recognition of revenue from the sale of land entitled for an aggregate of 369 homesites on approximately 29.5 acres during the same period in 2019. Initial gross proceeds from the 2020 sale were $20.3 million, representing the base purchase price from the final take down of homesites under a phased purchase and sale agreement. The first take down closed in the fourth quarter of 2019. We also recognized $0.5 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that we expect to be entitled to receive. Initial gross proceeds from the 2019 sale were $151.9 million representing the base purchase price. We also recognized $3.6 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that we expect to be entitled to receive. During the three months ended March 31, 2020 and March 31, 2019, revenues also included changes in estimates of variable consideration, including profit participation, from those amounts previously recorded by the Great Park Venture as well as revenues generated by the management company from development management services provided to the Great Park Venture.
Selling, general, and administrative. Selling, general, and administrative expenses increased by $5.4 million, or 81.7%, to $11.9 million for the three months ended March 31, 2020, from $6.6 million for the three months ended March 31, 2019. The higher expense during the three months ended March 31, 2020 is primarily attributable to increased marketing and grand opening activities in connection with active neighborhoods at the Great Park Neighborhoods.
36
Management fees—related party. Management fees decreased by $8.1 million, or 98.1%, to $0.2 million for the three months ended March 31, 2020, from $8.2 million for the three months ended March 31, 2019. Management fees incurred by the Great Park Venture are comprised of base development management fees and incentive compensation fees. In general, incentive compensation fees will be paid as a percentage of distributions made to holders of the Great Park Venture’s percentage interests. When payments are deemed probable of being made, the Great Park Venture recognizes the expense ratably over the period services are expected to be provided. When estimates of the amount of incentive compensation probable of being paid change, the Great Park Venture records a cumulative adjustment in the period in which the estimate changes. During the three months ended March 31, 2020, in connection with evaluating the impacts of COVID-19, the Great Park Venture reduced its estimate of the amount of incentive compensation probable of being paid, resulting in a reduction in total management fee expense recognized during the quarter.
The table below reconciles the Great Park segment results to the equity in (loss) earnings from our investment in the Great Park Venture that is reflected in the condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019.
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (in thousands) | |||||||||||
Segment net (loss) income from operations | $ | (2,542) | $ | 40,268 | |||||||
Less net income of management company attributed to the Great Park segment | 1,776 | 3,157 | |||||||||
Net (loss) income of Great Park Venture | (4,318) | 37,111 | |||||||||
The Company’s share of net (loss) income of the Great Park Venture | (1,619) | 13,917 | |||||||||
Basis difference amortization | (1,890) | (4,473) | |||||||||
Other-than-temporary investment impairment | (26,851) | — | |||||||||
Equity in (loss) earnings from the Great Park Venture | $ | (30,360) | $ | 9,444 | |||||||
Commercial Segment
We have a 75% interest in the Gateway Commercial Venture that is held through a wholly owned subsidiary of the operating company, and we serve as the manager of the Gateway Commercial Venture. However, the manager’s authority is limited. Major decisions by the Gateway Commercial Venture generally require unanimous approval by an executive committee composed of two people designated by us and two people designated by another investor. Some decisions require approval by all of the members of the Gateway Commercial Venture. We do not include the Gateway Commercial Venture as a consolidated subsidiary in our consolidated financial statements. However, as a result of our 75% economic interest and our role as manager, we assess our investment in the Gateway Commercial Venture based on the financial information of the Gateway Commercial Venture in its entirety, and we include the Gateway Commercial Venture’s financial results within the Commercial segment. Additionally, the management company has been engaged by the Gateway Commercial Venture to provide property management services to the Five Point Gateway Campus. We include the management company’s results of operations related to these property management services within the Commercial segment.
The Five Point Gateway Campus is a commercial office campus consisting of approximately 73 acres of land in the Great Park Neighborhoods containing four newly constructed buildings, two of which are leased by a subsidiary of Broadcom Limited (together with its subsidiaries, “Broadcom”). The Five Point Gateway Campus includes approximately one million square feet planned for research and development and office space in the four buildings, which are designed to accommodate thousands of employees. Broadcom is the largest tenant, leasing
37
approximately 660,000 square feet of research and development space pursuant to a 20-year triple net lease. We and Lennar have entered into separate 130-month full service gross leases occupying approximately 135,000 aggregate square feet. In June 2019, the Gateway Commercial Venture entered into a non-binding letter of intent to sell one of the buildings to City of Hope, which intends to develop and operate a comprehensive cancer care center and build a future micro hospital.
The following table summarizes the results of operations of our Commercial segment for the three months ended March 31, 2020 and 2019.
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (in thousands) | |||||||||||
| Statement of Operations Data | |||||||||||
| Revenues | |||||||||||
Rental and related income | $ | 6,415 | $ | 6,391 | |||||||
Rental and related income—related party | 2,061 | 1,989 | |||||||||
Property management services—related party | 97 | (31) | |||||||||
Total revenues | 8,573 | 8,349 | |||||||||
| Costs and expenses | |||||||||||
Rental operating expenses | 1,636 | 1,564 | |||||||||
Interest | 3,711 | 4,331 | |||||||||
Depreciation | 2,743 | 2,177 | |||||||||
Amortization | 1,038 | 1,029 | |||||||||
Other expenses | 83 | 29 | |||||||||
Total costs and expenses | 9,211 | 9,130 | |||||||||
| Segment loss | $ | (638) | $ | (781) | |||||||
Three Months Ended March 31, 2020 and 2019
Revenues. Revenues increased by $0.2 million, or 2.7%, to $8.6 million for the three months ended March 31, 2020, from $8.3 million for the three months ended March 31, 2019. Revenues are generated from tenant leases and property management services provided by the management company to the Gateway Commercial Venture.
The table below reconciles the Commercial segment results to the equity in loss from our investment in the Gateway Commercial Venture that is reflected in the condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019.
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (in thousands) | |||||||||||
Segment net loss from operations | $ | (638) | $ | (781) | |||||||
Less net income (loss) of management company attributed to the Commercial segment | 97 | (31) | |||||||||
Net loss of Gateway Commercial Venture | (735) | (750) | |||||||||
Equity in loss from the Gateway Commercial Venture | $ | (551) | $ | (562) | |||||||
38
Financial Condition, Liquidity and Capital Resources
As of March 31, 2020, we had $247.8 million of consolidated cash and cash equivalents compared to $346.8 million at December 31, 2019. As of March 31, 2020, no funds have been drawn on the operating company’s $125.0 million revolving credit facility. However, letters of credit of $0.3 million are issued and outstanding under the revolving credit facility, thus reducing the available capacity to $124.7 million.
Our short-term cash needs consist primarily of general and administrative expenses and development expenditures at Valencia and the Candlestick and The San Francisco Shipyard communities, interest payments under our senior notes and payments under a related party reimbursement obligation. The development stages of our master-planned communities continue to require significant cash outlays on both a short-term and long-term basis. While our current financial position is strong, the COVID-19 pandemic has had a significant impact on the US and California economies and our business and the extent and duration of the current environment is unknown. We expect delays in the timing of expected land sales at Valencia and the Great Park Neighborhoods and in response we have limited development activities and expenditures. We expect to meet our cash requirements for at least the next 12 months with available cash, proceeds from land sales in Valencia, distributions from our unconsolidated entities and collection of management fees under our various management agreements.
Our long-term cash needs relate primarily to future horizontal development expenditures and investments in, or vertical construction costs for, properties that we may acquire or develop for our income-producing portfolio. We budget our cash development costs on an annual basis. Budgeted amounts are subject to change due to delays or accelerations in construction or regulatory approvals, changes in inflation rates and other increases (or decreases) in costs. We may also modify our development plans or change the sequencing of our communities in response to changing economic conditions, consumer preferences and other factors, which could have a material impact on the timing and amount of our development costs. Budgeted amounts are expected to be funded through a combination of available cash, cash flows from our communities and reimbursements from public financing, including community facilities districts, tax increment financing and local, state and federal grants. Cash flows from our communities may occur in uneven patterns as cash is primarily generated by land sales, which can occur at various points over the life cycle of our communities.
We continue to analyze the impact of timeline delays of three, six and nine months to our communities as a result of COVID-19. In each scenario, we currently expect to have sufficient capital to fund the horizontal development of our communities in accordance with our development plan for several years. However, the duration and lasting effects of COVID-19 are unknown, we may experience cost increases, our plans may change or circumstances may arise that result in our needing additional capital to execute our development plan. In addition, the level of capital expenditures in any given year may vary due to, among other things, the number of communities or neighborhoods under development and the number of planned deliveries, which may vary based on market conditions. We may seek to raise additional capital by accessing the debt or equity capital markets or with one or more revolving or term loan facilities or other public or private financing alternatives. These financings may not be available on attractive terms, or at all.
Summary of Cash Flows
The following table outlines the primary components of net cash provided by (used in) operating, investing and financing activities (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
Operating activities | $ | (89,426) | $ | (83,652) | |||||||
Investing activities | 1,017 | 267 | |||||||||
Financing activities | (10,669) | (38,682) | |||||||||
39
Cash Flows from Operating Activities. Cash flows from operating activities are primarily comprised of cash inflows from land sales, management services and operating property results. Cash outflows are comprised primarily of cash outlays for horizontal development costs, employee compensation and selling, general, and administrative costs. Our operating cash flows may vary significantly each year due to the timing of land sales and the development efforts related to our communities.
Net cash used in operating activities increased by $5.8 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Major components of operating cash used in both periods consist of our continued investment in horizontal development at our communities and selling, general, and administrative costs. In addition, during the three months ended March 31, 2019, we settled the accrued interest on the Macerich promissory note of $11.1 million.
Cash Flows from Investing Activities. Net cash provided by investing activities was $1.0 million for the three months ended March 31, 2020 compared to $0.3 million net cash provided by investing activities for the three months ended March 31, 2019.
For the three months ended March 31, 2020, we received a distribution of $1.7 million from our indirect legacy interest in the Great Park Venture. During the three months ended March 31, 2019, we received a distribution of $1.5 million from the Gateway Commercial Venture. In both periods, the distributions were offset by our purchases of properties and equipment.
Cash Flows from Financing Activities. Net cash used in financing activities was $10.7 million for the three months ended March 31, 2020 compared to $38.7 million net cash used in financing activities for the three months ended March 31, 2019.
We used $5.5 million and $4.1 million during the three months ended March 31, 2020 and 2019, respectively, to net settle certain share-based compensation awards with employees for tax withholding purposes. For the three months ended March 31, 2020, we made a noncontrolling interest tax distribution of $4.6 million in the accordance with the Operating Company's Limited Partnership Agreement (“LPA”). The tax distribution is treated as an advance distribution under the LPA. During the three months ended March 31, 2019, we received cash proceeds of $25.0 million related to the issuance of San Francisco Venture Class C units to an affiliate of Lennar (see Note 5 to our condensed consolidated financial statements included under Part I, Item 1 of this report) and repaid the Macerich promissory note of $65.1 million.
40
Changes in Capital Structure
During the three months ended March 31, 2020, our ownership percentage in the operating company increased to 62.5%, primarily due to the operating company issuing us additional Class A units in connection with our issuance of Class A common shares under our share-based compensation plan. Additionally, we reacquired approximately 0.4 million restricted Class A common shares from employees for income tax withholding purposes that resulted in the operating company retiring an equal number of Class A units of the operating company that we previously held.
The table below summarizes outstanding Class A units of the operating company and Class A units of the San Francisco Venture (redeemable on a one-for-one basis for Class A units of the operating company) held by us and held by noncontrolling interest members at March 31, 2020 and December 31, 2019.
| March 31, 2020 | December 31, 2019 | ||||||||||
| Class A units of the operating company: | |||||||||||
| Held by us | 69,061,898 | 68,788,257 | |||||||||
| Held by noncontrolling interest members | 41,363,271 | 41,363,271 | |||||||||
| 110,425,169 | 110,151,528 | ||||||||||
| Class A units of the San Francisco Venture held by noncontrolling interest members | 37,870,273 | 37,870,273 | |||||||||
| 148,295,442 | 148,021,801 | ||||||||||
At March 31, 2020, we had 79,233,544 Class B common shares that were held by the noncontrolling interest members of the operating company and the Class A unitholders of the San Francisco Venture. The Class B common shares will automatically convert to Class A common shares at a ratio of 0.0003 Class A common shares for each Class B common share. The conversions will occur when the holders of class A units of the operating company, including Class A units that have been issued upon redemption of Class A units of the San Francisco Venture, are redeemed at our election for our Class A common shares or cash.
Contractual Obligations and Commitments
Other than below, our contractual obligations have not changed materially from those reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
On April 1, 2020, we were obligated to make an $18.6 million payment under our related party reimbursement obligation. We entered into a new agreement, however, on April 1, 2020, pursuant to which the related party affiliate agreed to defer our reimbursement obligation with respect to $12.6 million of the total payment for a period of five years. The deferred $12.6 million reimbursement amount will accrue interest at a rate of 6% per year and can be prepaid by us at any time without any premium or penalty. We paid the $6.0 million non-deferred portion of the reimbursement obligation on April 1, 2020.
We are committed under various letters of credit (“LOCs”) to perform certain development activities and provide certain guarantees in the normal course of business. Outstanding LOCs totaled $1.8 million and $2.4 million at March 31, 2020 and December 31, 2019, respectively. At both March 31, 2020 and December 31, 2019, we had $1.4 million in restricted cash and certificates of deposit securing certain of our LOCs. Additionally, under our revolving credit facility, we are able to utilize undrawn capacity to support the issuance of LOCs. As of March 31, 2020, we were using approximately $0.3 million in capacity under the revolving credit facility to support LOCs. In the ordinary course of business and as a part of the entitlement and development process, we are required to provide performance bonds to ensure completion of certain development obligations. We had outstanding performance bonds of $228.1 million as of March 31, 2020.
41
At March 31, 2020, we had outstanding guarantees benefiting a municipal agency for infrastructure and construction of certain park and open space obligations with aggregate maximum obligations of $197.8 million.
Critical Accounting Policies
There have been no significant changes to our critical accounting policies during the three months ended March 31, 2020 as compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Recently Issued Accounting Pronouncements and Developments
See Note 2 to our condensed consolidated financial statements included under Part I, Item 1 of this report for a discussion of new accounting pronouncements applicable to the Company.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements as of March 31, 2020.
Seasonality
Our business and results of operations are not materially impacted by seasonality.
42
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices and interest rates. Our future earnings, cash flows and fair values relative to financial instruments are dependent upon prevailing market interest rates. Our primary market risk results from our indebtedness, which bears interest at fixed rates. Although we do not currently do so, we may in the future manage our market risk on floating rate debt by entering into swap arrangements to in effect fix the rate on all or a portion of the debt for varying periods up to maturity. This would, in turn, reduce the risks of variability of cash flows created by floating rate debt and mitigate the risk of increases in interest rates. Our objective when undertaking such arrangements would be to reduce our floating rate exposure, as we do not plan to enter into hedging arrangements for speculative purposes.
As of March 31, 2020, we had outstanding consolidated net indebtedness of $616.4 million, none of which bears interest based on floating interest rates.
We have not entered into any transactions using derivative financial instruments or derivative commodity instruments.
43
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the supervision and participation of our President and Chief Executive Officer and our Vice President and Chief Financial Officer (the “Certifying Officers”), has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2020. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management, including our Certifying Officers and our Board of Directors, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, the Certifying Officers concluded that our disclosure controls and procedures were effective as of March 31, 2020.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
44
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
For disclosures of legal proceedings, see Note 12 to our condensed consolidated financial statements included under Part I, Item 1 of this report, which is incorporated herein by reference.
ITEM 1A. Risk Factors
In addition to the risk factors previously identified in our Annual Report on Form 10-K for the year ended December 31, 2019, we have added the following risk factor to expand our discussion of risks related to public heath issues and other events that may impact our business.
Our business has been disrupted by the present outbreak and worldwide spread of COVID-19 and could be materially and adversely affected by COVID-19 or by a similar epidemic or pandemic, or similar public threat, or fear of such an event, and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it.
The U.S. and other countries have experienced, and may experience in the future, outbreaks of contagious diseases that affect public health and public perception of health risk. In late 2019, a novel coronavirus (COVID-19) emerged in the Wuhan region of China and has subsequently spread worldwide. The World Health Organization has declared COVID-19 a pandemic, resulting in federal, state and local governments and private entities mandating various restrictions, requiring closure of non-essential businesses and recommending people remain at home in all of the markets we serve. In response to these steps, in mid-March, we temporarily shifted substantially all of our office functions to work remotely, placed restrictions on business travel for our employees and imposed mandatory quarantine periods for employees who traveled to areas impacted by the pandemic. Furthermore, although the State of California currently classifies construction as an essential business, we have temporarily limited development activities at our communities to only those activities essential to supporting active homebuilding by builders.
Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence and consumer confidence. There is significant uncertainty regarding the extent to which and how long COVID-19 and related government directives, actions and economic relief efforts will disrupt the U.S. economy. Our business could be negatively impacted over the medium-to-longer term if the disruptions related to COVID-19 decrease consumer confidence generally or with respect to purchasing a home; cause civil unrest; or precipitate a prolonged economic downturn and/or an extended rise in unemployment or tempering of wage growth, any of which could lower demand for homesites at our communities; impair our ability to generate revenues and cash flows and/or to access the capital or lending markets (or significantly increase the costs of doing so); increase the costs or decrease the availability of contractors and subcontractors and other talent, including as a result of infections or medically necessary or recommended self-quarantining; and/or result in our recognizing charges in future periods, which may be material, for asset impairments similar to the impairment of $26.9 million attributed to our investment in the Great Park Venture primarily as a result of expected delays in both the timing of land sales to builders and distributions to us causing a decline in the fair value of our investment in the Great Park Venture described above in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The extent to which COVID-19 impacts our operational and financial performance will depend on future developments, including the duration and spread of COVID-19 and the impact on homebuilders and our trade partners and employees, all of which are highly uncertain and cannot be predicted. If COVID-19 has a significant negative impact on economic conditions over a prolonged period of time, our results of operations and financial condition could be adversely impacted. COVID-19 also may have the effect of heightening many of the other risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
45
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about the Company’s purchases of equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934 for the three months ended March 31, 2020:
| Period | Total number of shares purchased (1) | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number of shares that may yet be purchased under the plans or programs | ||||||||||||||||||||||
| January 1, 2020 to January 31, 2020 | 436,675 | $ | 8.09 | — | — | |||||||||||||||||||||
| February 1, 2020 to February 29, 2020 | — | — | — | — | ||||||||||||||||||||||
| March 1, 2020 to March 31, 2020 | — | — | — | — | ||||||||||||||||||||||
| 436,675 | $ | 8.09 | — | — | ||||||||||||||||||||||
(1) Represents shares repurchased by the Company pursuant to provisions in agreements with recipients of restricted shares granted under our equity compensation plan that allow the Company to repurchase, or the recipient to deliver to us, the number of shares with a fair value equal to the minimum statutory tax withholding due upon vesting of the restricted shares.
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Mine Safety Disclosures
Not Applicable
ITEM 5. Other Information
None
46
ITEM 6. Exhibits
| Exhibit | Exhibit Description | ||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. | ||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | ||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | ||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | ||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | ||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | ||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | ||||
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FIVE POINT HOLDINGS, LLC | ||||||||
By: | /s/ Emile Haddad | |||||||
Emile Haddad | ||||||||
Chairman, President and Chief Executive Officer | ||||||||
(Principal Executive Officer) | ||||||||
By: | /s/ Erik Higgins | |||||||
Erik Higgins | ||||||||
Chief Financial Officer and Vice President | ||||||||
(Principal Financial Officer and Principal Accounting Officer) | ||||||||
Date: May 8, 2020
48