FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except shares)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
ASSETS
|
|
|
|
INVENTORIES
|
$
|
1,546,683
|
|
|
$
|
1,425,892
|
|
INVESTMENT IN UNCONSOLIDATED ENTITIES
|
538,470
|
|
|
530,007
|
|
PROPERTIES AND EQUIPMENT, NET
|
29,449
|
|
|
29,656
|
|
ASSETS HELD FOR SALE, NET
|
—
|
|
|
4,519
|
|
INTANGIBLE ASSET, NET—RELATED PARTY
|
100,932
|
|
|
127,593
|
|
CASH AND CASH EQUIVALENTS
|
678,637
|
|
|
848,478
|
|
RESTRICTED CASH AND CERTIFICATES OF DEPOSIT
|
1,403
|
|
|
1,467
|
|
RELATED PARTY ASSETS
|
53,416
|
|
|
3,158
|
|
OTHER ASSETS
|
9,292
|
|
|
7,585
|
|
TOTAL
|
$
|
2,958,282
|
|
|
$
|
2,978,355
|
|
|
|
|
|
LIABILITIES AND CAPITAL
|
|
|
|
LIABILITIES:
|
|
|
|
Notes payable, net
|
$
|
556,409
|
|
|
$
|
560,618
|
|
Accounts payable and other liabilities
|
168,128
|
|
|
167,620
|
|
Liabilities related to assets held for sale
|
—
|
|
|
5,363
|
|
Related party liabilities
|
177,491
|
|
|
186,670
|
|
Payable pursuant to tax receivable agreement
|
168,027
|
|
|
152,475
|
|
Total liabilities
|
1,070,055
|
|
|
1,072,746
|
|
|
|
|
|
COMMITMENTS AND CONTINGENT LIABILITIES (Note 12)
|
|
|
|
CAPITAL:
|
|
|
|
Class A common shares; No par value; Issued and outstanding: 2018—66,537,852 shares; 2017—62,314,850 shares
|
|
|
|
Class B common shares; No par value; Issued and outstanding: 2018—79,145,487 shares; 2017—81,463,433 shares
|
|
|
|
Contributed capital
|
549,403
|
|
|
530,015
|
|
Retained earnings
|
58,133
|
|
|
57,841
|
|
Accumulated other comprehensive loss
|
(2,550
|
)
|
|
(2,455
|
)
|
Total members’ capital
|
604,986
|
|
|
585,401
|
|
Noncontrolling interests
|
1,283,241
|
|
|
1,320,208
|
|
Total capital
|
1,888,227
|
|
|
1,905,609
|
|
TOTAL
|
$
|
2,958,282
|
|
|
$
|
2,978,355
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
REVENUES:
|
|
|
|
|
|
|
|
Land sales
|
$
|
3
|
|
|
$
|
4,739
|
|
|
$
|
52
|
|
|
$
|
5,204
|
|
Land sales—related party
|
221
|
|
|
587
|
|
|
442
|
|
|
84,858
|
|
Management services—related party
|
11,440
|
|
|
5,481
|
|
|
23,207
|
|
|
10,951
|
|
Operating properties
|
1,426
|
|
|
2,439
|
|
|
4,356
|
|
|
4,536
|
|
Total revenues
|
13,090
|
|
|
13,246
|
|
|
28,057
|
|
|
105,549
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
Land sales
|
52
|
|
|
1,667
|
|
|
90
|
|
|
82,114
|
|
Management services
|
6,763
|
|
|
2,657
|
|
|
13,852
|
|
|
5,306
|
|
Operating properties
|
1,107
|
|
|
2,912
|
|
|
3,497
|
|
|
5,192
|
|
Selling, general, and administrative
|
29,015
|
|
|
27,957
|
|
|
57,611
|
|
|
55,155
|
|
Total costs and expenses
|
36,937
|
|
|
35,193
|
|
|
75,050
|
|
|
147,767
|
|
OTHER INCOME:
|
|
|
|
|
|
|
|
Adjustment to payable pursuant to tax receivable agreement
|
—
|
|
|
—
|
|
|
1,928
|
|
|
—
|
|
Interest income
|
2,910
|
|
|
—
|
|
|
5,657
|
|
|
—
|
|
Miscellaneous
|
631
|
|
|
23
|
|
|
8,412
|
|
|
46
|
|
Total other income
|
3,541
|
|
|
23
|
|
|
15,997
|
|
|
46
|
|
EQUITY IN EARNINGS (LOSS) FROM UNCONSOLIDATED ENTITIES
|
9,003
|
|
|
(2,365
|
)
|
|
5,396
|
|
|
(5,241
|
)
|
LOSS BEFORE INCOME TAX BENEFIT
|
(11,303
|
)
|
|
(24,289
|
)
|
|
(25,600
|
)
|
|
(47,413
|
)
|
INCOME TAX BENEFIT
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
NET LOSS
|
(11,303
|
)
|
|
(24,289
|
)
|
|
(25,600
|
)
|
|
(47,413
|
)
|
LESS NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
|
(6,143
|
)
|
|
(14,506
|
)
|
|
(15,208
|
)
|
|
(29,788
|
)
|
NET LOSS ATTRIBUTABLE TO THE COMPANY
|
$
|
(5,160
|
)
|
|
$
|
(9,783
|
)
|
|
$
|
(10,392
|
)
|
|
$
|
(17,625
|
)
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO THE COMPANY PER CLASS A SHARE
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.08
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.39
|
)
|
Diluted
|
$
|
(0.08
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.39
|
)
|
WEIGHTED AVERAGE CLASS A SHARES OUTSTANDING
|
|
|
|
|
|
|
|
Basic
|
65,076,395
|
|
|
50,993,481
|
|
|
64,226,628
|
|
|
44,931,512
|
|
Diluted
|
65,076,395
|
|
|
50,993,481
|
|
|
144,853,566
|
|
|
44,931,512
|
|
NET LOSS ATTRIBUTABLE TO THE COMPANY PER CLASS B SHARE
|
|
|
|
|
|
|
|
Basic and diluted
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
WEIGHTED AVERAGE CLASS B SHARES OUTSTANDING
|
|
|
|
|
|
|
|
Basic and diluted
|
79,794,047
|
|
|
77,931,250
|
|
|
80,602,759
|
|
|
76,145,972
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
NET LOSS
|
$
|
(11,303
|
)
|
|
$
|
(24,289
|
)
|
|
$
|
(25,600
|
)
|
|
$
|
(47,413
|
)
|
OTHER COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
Reclassification of actuarial loss on defined benefit pension plan included in net loss
|
21
|
|
|
28
|
|
|
43
|
|
|
56
|
|
Other comprehensive income before taxes
|
21
|
|
|
28
|
|
|
43
|
|
|
56
|
|
INCOME TAX PROVISION RELATED TO OTHER COMPREHENSIVE INCOME
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
OTHER COMPREHENSIVE INCOME—Net of tax
|
21
|
|
|
28
|
|
|
43
|
|
|
56
|
|
COMPREHENSIVE LOSS
|
(11,282
|
)
|
|
(24,261
|
)
|
|
(25,557
|
)
|
|
(47,357
|
)
|
LESS COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
|
(6,135
|
)
|
|
(14,495
|
)
|
|
(15,191
|
)
|
|
(29,763
|
)
|
COMPREHENSIVE LOSS ATTRIBUTABLE TO THE COMPANY
|
$
|
(5,147
|
)
|
|
$
|
(9,766
|
)
|
|
$
|
(10,366
|
)
|
|
$
|
(17,594
|
)
|
See accompanying notes to unaudited condensed consolidated financial statements.
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
Deficit)
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Total
Members’
Capital
|
|
Noncontrolling
Interests
|
|
Total
Capital
|
BALANCE - December 31, 2017
|
62,314,850
|
|
|
81,463,433
|
|
|
$
|
530,015
|
|
|
$
|
57,841
|
|
|
$
|
(2,455
|
)
|
|
$
|
585,401
|
|
|
$
|
1,320,208
|
|
|
$
|
1,905,609
|
|
Adoption of accounting standards
|
—
|
|
|
—
|
|
|
—
|
|
|
10,684
|
|
|
—
|
|
|
10,684
|
|
|
13,961
|
|
|
24,645
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,392
|
)
|
|
—
|
|
|
(10,392
|
)
|
|
(15,208
|
)
|
|
(25,600
|
)
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
6,141
|
|
|
—
|
|
|
—
|
|
|
6,141
|
|
|
—
|
|
|
6,141
|
|
Reacquisition of share-based compensation awards for tax-withholding purposes
|
(68,886
|
)
|
|
—
|
|
|
(5,131
|
)
|
|
—
|
|
|
—
|
|
|
(5,131
|
)
|
|
—
|
|
|
(5,131
|
)
|
Settlement of restricted share units for Class A shares of common stock
|
319,783
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of share-based compensation awards, net of forfeitures
|
1,653,467
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other comprehensive income—net of tax of $0
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26
|
|
|
26
|
|
|
17
|
|
|
43
|
|
Redemption of noncontrolling interests
|
2,318,638
|
|
|
(2,317,946
|
)
|
|
26,765
|
|
|
—
|
|
|
(90
|
)
|
|
26,675
|
|
|
(26,675
|
)
|
|
—
|
|
Adjustment to liability recognized under tax receivable agreement—net of tax of $0
|
—
|
|
|
—
|
|
|
(17,480
|
)
|
|
—
|
|
|
—
|
|
|
(17,480
|
)
|
|
—
|
|
|
(17,480
|
)
|
Adjustment of noncontrolling interest in the Operating Company
|
—
|
|
|
—
|
|
|
9,093
|
|
|
—
|
|
|
(31
|
)
|
|
9,062
|
|
|
(9,062
|
)
|
|
—
|
|
BALANCE - June 30, 2018
|
66,537,852
|
|
|
79,145,487
|
|
|
$
|
549,403
|
|
|
$
|
58,133
|
|
|
$
|
(2,550
|
)
|
|
$
|
604,986
|
|
|
$
|
1,283,241
|
|
|
$
|
1,888,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE - December 31, 2016
|
37,426,008
|
|
|
74,320,576
|
|
|
$
|
260,779
|
|
|
$
|
(15,394
|
)
|
|
$
|
(2,469
|
)
|
|
$
|
242,916
|
|
|
$
|
1,265,197
|
|
|
$
|
1,508,113
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(17,625
|
)
|
|
—
|
|
|
(17,625
|
)
|
|
(29,788
|
)
|
|
(47,413
|
)
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
8,806
|
|
|
—
|
|
|
—
|
|
|
8,806
|
|
|
—
|
|
|
8,806
|
|
Reacquisition of share-based compensation for tax-withholding purposes
|
—
|
|
|
—
|
|
|
(6,480
|
)
|
|
—
|
|
|
—
|
|
|
(6,480
|
)
|
|
—
|
|
|
(6,480
|
)
|
Settlement of restricted share units for Class A shares of common stock
|
285,670
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of share-based compensation awards
|
396,028
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of Class A common shares in initial public offering—net of underwriting discount and offering costs of $21,294
|
24,150,000
|
|
|
—
|
|
|
316,806
|
|
|
—
|
|
|
—
|
|
|
316,806
|
|
|
—
|
|
|
316,806
|
|
Issuance of Class A Common Units and related sale of Class B common shares in private placement
|
—
|
|
|
7,142,857
|
|
|
45
|
|
|
—
|
|
|
—
|
|
|
45
|
|
|
100,000
|
|
|
100,045
|
|
Adjustment to liability recognized under tax receivable agreement-net of tax of $0
|
—
|
|
|
—
|
|
|
(56,216
|
)
|
|
—
|
|
|
—
|
|
|
(56,216
|
)
|
|
—
|
|
|
(56,216
|
)
|
Other comprehensive income—net of tax of $0
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
31
|
|
|
31
|
|
|
25
|
|
|
56
|
|
Adjustment of Noncontrolling interest in the Operating Company
|
—
|
|
|
—
|
|
|
(3,616
|
)
|
|
—
|
|
|
(407
|
)
|
|
(4,023
|
)
|
|
4,023
|
|
|
—
|
|
BALANCE - June 30, 2017
|
62,257,706
|
|
|
81,463,433
|
|
|
$
|
520,124
|
|
|
$
|
(33,019
|
)
|
|
$
|
(2,845
|
)
|
|
$
|
484,260
|
|
|
$
|
1,339,457
|
|
|
$
|
1,823,717
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited
)
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net loss
|
$
|
(25,600
|
)
|
|
$
|
(47,413
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
|
|
|
|
Equity in (earnings) loss from unconsolidated entities
|
(5,396
|
)
|
|
5,241
|
|
Depreciation and amortization
|
7,812
|
|
|
1,019
|
|
Noncash adjustment of payable pursuant to tax receivable agreement
|
(1,928
|
)
|
|
—
|
|
Gain on sale of golf course operating properties
|
(6,700
|
)
|
|
—
|
|
Gain on insurance proceeds for damaged property
|
(1,550
|
)
|
|
—
|
|
Share-based compensation
|
6,141
|
|
|
8,806
|
|
Changes in operating assets and liabilities:
|
|
|
|
Inventories
|
(129,388
|
)
|
|
38,102
|
|
Related party assets
|
(10,165
|
)
|
|
44,909
|
|
Other assets
|
(960
|
)
|
|
(821
|
)
|
Accounts payable and other liabilities
|
2,482
|
|
|
(16,686
|
)
|
Related party liabilities
|
306
|
|
|
(32,101
|
)
|
Net cash (used in) provided by operating activities
|
(164,946
|
)
|
|
1,056
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Proceeds from the maturity of marketable securities
|
—
|
|
|
35,210
|
|
Purchase of marketable securities
|
—
|
|
|
(25,233
|
)
|
Purchase of indirect Legacy Interest in Great Park Venture—related party
|
(1,762
|
)
|
|
—
|
|
Proceeds from sale of golf course operating property
|
5,685
|
|
|
—
|
|
Proceeds from insurance on damaged property
|
1,601
|
|
|
—
|
|
Cash from former San Francisco Venture members in relation to Formation Transactions
|
—
|
|
|
30,000
|
|
Purchase of properties and equipment
|
(352
|
)
|
|
(119
|
)
|
Net cash provided by investing activities
|
5,172
|
|
|
39,858
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Proceeds of Initial Public Offering of Class A common shares—net of underwriting discounts of $18,402
|
—
|
|
|
319,698
|
|
Proceeds of Class B common share offering
|
—
|
|
|
45
|
|
Proceeds from issuance of Class A Common Units in private placement
|
—
|
|
|
100,000
|
|
Principal payment on settlement note
|
(5,000
|
)
|
|
—
|
|
Payment of equity offering costs
|
—
|
|
|
(1,730
|
)
|
Reacquisition of share-based compensation awards for tax-withholding purposes
|
(5,131
|
)
|
|
(6,480
|
)
|
Payment of financing costs
|
—
|
|
|
(385
|
)
|
Net cash (used in) provided by financing activities
|
(10,131
|
)
|
|
411,148
|
|
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
|
(169,905
|
)
|
|
452,062
|
|
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—Beginning of period
|
849,945
|
|
|
64,647
|
|
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—End of period
|
$
|
680,040
|
|
|
$
|
516,709
|
|
SUPPLEMENTAL CASH FLOW INFORMATION (Note 13)
See accompanying notes to unaudited condensed consolidated financial statements.
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 Holding Company was formed on July 21, 2009. Prior to May 2, 2016, the Holding Company was named Newhall Holding Company, LLC and was primarily engaged in the planning and development of Newhall Ranch, a master-planned community located in northern Los Angeles County, California. On May 2, 2016, the Company completed a series of transactions (the “Formation Transactions”) pursuant to a Second Amended and Restated Contribution and Sale Agreement (the “Contribution and Sale Agreement”), the principal organizational elements of which were that the Company acquired:
|
|
•
|
an interest in, and became the managing member of, The Shipyard Communities, LLC, a Delaware limited liability company (the “San Francisco Venture”), which is developing the Candlestick Point and The San Francisco Shipyard communities in San Francisco, California;
|
|
|
•
|
a
37.5%
percentage interest in Heritage Fields LLC, a Delaware limited liability company (the “Great Park Venture”), which is developing Great Park Neighborhoods in Irvine, California; and
|
|
|
•
|
all of the Class A interests in Five Point Communities, LP, a Delaware limited partnership (“FP LP”), and all of the shares of its general partner, Five Point Communities Management, Inc., a Delaware corporation (“FP Inc.” and together with FP LP, the “Management Company”), which have historically managed the development of Great Park Neighborhoods and Newhall Ranch.
|
In August 2017, the Company acquired a
75%
interest in Five Point Office Venture Holdings I, LLC, a Delaware limited liability company (the “Gateway Commercial Venture”), that 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”).
Initial Public Offering
On May 15, 2017, the Holding Company completed an initial public offering (“IPO”) and sold
24,150,000
Class A common shares at a public offering price of
$14.00
per share, which included
3,150,000
shares pursuant to the full exercise by the underwriters of their over-allotment option, resulting in gross proceeds of
$338.1 million
. The Holding Company used the net proceeds of the IPO to purchase
24,150,000
Class A Common Units of the Operating Company. The aggregate net proceeds to the Company after deducting underwriting discounts and commissions and before offering expenses payable by the Company, was
$319.7 million
.
Concurrent with the IPO, the Company completed a private placement with an affiliate of Lennar Corporation (“Lennar”) in which the Operating Company sold
7,142,857
Class A Common Units of the Operating Company at a price per unit equal to the IPO public offering price per share, and the Holding Company sold an equal number of Class B common shares at a price of
$0.00633
per share. There were no underwriting fees, discounts or commissions, and aggregate proceeds from the private placement were
$100.0 million
. The Holding Company used the proceeds from the sale of the Class B common shares to purchase
7,142,857
Class B Common Units of the Operating Company at a price of
$0.00633
per unit.
The diagram below presents a simplified depiction of the Company’s current organizational structure as of
June 30, 2018
:
(1) A wholly owned subsidiary of the Holding Company serves as the sole managing general partner of the Operating Company. As of
June 30, 2018
, the Company owned approximately
61.5%
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 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
July 31, 2018
(
$11.19
), the equity market capitalization of the Company was approximately
$1.6 billion
.
(2) The Operating Company owns all of the outstanding Class B units of the San Francisco Venture. 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.
(3) Together, the Operating Company and the Management Company own 100% of Five Point Land, LLC, a Delaware limited liability company (“FPL”), the entity developing Newhall Ranch. The Operating Company has a controlling interest in the Management Company.
(4) 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 equal to
$565.0 million
, of which
$355.0 million
had been distributed as of July 31, 2018. The Company owns a
37.5%
Percentage Interest in the Great Park Venture, and serves as its administrative member. However, management of the 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 in its consolidated financial statements.
(5) The Company owns a
75%
interest in the Gateway Commercial Venture and serves as its manager. 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 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, 2017. 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 and
six months ended
June 30, 2018
are not necessarily indicative of the results that may be expected for the full year.
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.
Miscellaneous other income
—Miscellaneous other income consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Gain on sale of golf club operating property
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,700
|
|
|
$
|
—
|
|
Gain on insurance claims
|
550
|
|
|
—
|
|
|
1,550
|
|
|
—
|
|
Net periodic pension benefit
|
81
|
|
|
23
|
|
|
162
|
|
|
46
|
|
Total miscellaneous other income
|
$
|
631
|
|
|
$
|
23
|
|
|
$
|
8,412
|
|
|
$
|
46
|
|
Recently issued accounting pronouncements
—In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-07,
Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
(“ASU No. 2018-07”) which simplifies the accounting of share-based payments granted to nonemployees for goods and services. Under ASU No. 2018-07, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. One of the more significant changes under the new guidance is related to the determination of the measurement date. The measurement date is generally the date on which the measurement of equity-classified share-based payments becomes fixed. ASU No. 2018-07 eliminates the existing guidance in ASC
505-50,
Equity-Based Payments to Nonemployees,
on determining the measurement date for nonemployee share-based payment arrangements and aligns the guidance on measurement date with employee equity-classified awards, which generally is the grant date. ASU No. 2018-07 generally requires an entity to use a modified retrospective transition approach, with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption, for all (1) liability-classified nonemployee awards that have not been settled as of the adoption date and (2) equity-classified nonemployee awards for which a measurement date has not been established. The amendments in ASU No. 2018-07 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and early adoption is permitted. The Company is currently evaluating the impact of adopting ASU No. 2018-07 on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASU No. 2016-02”). This ASU requires that lessees recognize assets and liabilities for leases with lease terms greater than twelve months on the balance sheet and also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. This update is effective for public entities in fiscal years beginning after December 15, 2018, including interim reporting periods within those fiscal years. The FASB has issued multiple clarification and updates since ASU No. 2016-02 that include, but is not limited to, the ability for lessors to elect, as a practical expedient, not to separate lease and nonlease components (such as services rendered) in a contract for the purpose of revenue recognition and disclosure. The updated amendments also provide an additional (and optional) transition method to adopt the new lease requirements by allowing entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. For leases in which the Company is the lessee, the Company will recognize a right-of-use asset and a lease liability equal to the present value of the minimum lease payments. The Company is still evaluating the full impact of the adoption of ASU No. 2016-02 on January 1, 2019 to its consolidated financial statements.
In June 2016, the FASB issued 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 and loans. ASU No. 2016-13 adds to U.S. GAAP an impairment model known as the current expected credit loss model 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. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact of adopting ASU No. 2016-13 on its consolidated financial statements.
Recently adopted accounting pronouncements
—In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
(“ASU No. 2014-09”), which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted ASU No. 2014-09 and the related ASUs that formed Accounting Standards Codification (“ASC”) Topic 606,
Revenue from Contracts with Customers
, on January 1, 2018 using the modified retrospective approach with the cumulative effect recorded as an adjustment to opening capital. The new guidance was applied to contracts not completed at the transition date. Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with historic accounting under ASC Topic 605,
Revenue Recognition,
and other industry specific guidance.
The impact of adopting the new guidance primarily relates to (i) the recognition of variable incentive compensation consideration associated with the Company’s development management agreement with the Great Park Venture, which previously was recognized when contingencies associated with the amount and timing of the consideration were resolved, but under the new guidance estimates of the amount of variable consideration that the Company expects to be entitled to receive in revenue are recognized over time as management services are provided; (ii) the recognition of variable consideration from land sale contracts in the form of revenue or profit participation and marketing fees received from homebuilders, which historically have been recognized as revenue in the period in which the contingencies associated with the amount and timing of the consideration were resolved, but under the new guidance estimates of the amount of variable consideration that the Company expects to be entitled to receive in revenue, if any, are recognized at the time of land sale; (iii) the timing of revenue recognition from land sales or agriculture crop sales resulting from additional clarity in determining that the performance obligation to the
customer is complete when control of the land or crop has been transferred to the customer; (iv) the impact of adoption of ASU No. 2014-09 by the Company’s unconsolidated entities; and (v) the requirement to provide more robust disclosure on the nature of the Company’s transactions, the economic substance of the arrangements and the judgments involved.
The cumulative effect of the changes made to the Company’s consolidated January 1, 2018 balance sheet from the adoption of the new revenue guidance
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
Adjustments due to ASU No. 2014-09
|
|
Balance at January 1, 2018
|
ASSETS
|
|
|
|
|
|
Inventories
|
$
|
1,425,892
|
|
|
$
|
(9,457
|
)
|
|
$
|
1,416,435
|
|
Investment in unconsolidated entities
|
530,007
|
|
|
3,067
|
|
|
533,074
|
|
Intangible asset, net—related party
|
127,593
|
|
|
(19,220
|
)
|
|
108,373
|
|
Related party assets
|
3,158
|
|
|
38,332
|
|
|
41,490
|
|
Other assets
|
7,585
|
|
|
716
|
|
|
8,301
|
|
LIABILITIES
|
|
|
|
|
|
Accounts payable and other liabilities
|
167,620
|
|
|
(1,722
|
)
|
|
165,898
|
|
Related party liabilities
|
186,670
|
|
|
(9,485
|
)
|
|
177,185
|
|
CAPITAL
|
|
|
|
|
|
Retained earnings
|
57,841
|
|
|
10,684
|
|
|
68,525
|
|
Noncontrolling interests
|
1,320,208
|
|
|
13,961
|
|
|
1,334,169
|
|
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)
(“ASU No. 2016-15”) which amends the guidance in ASC Topic 230,
Statement of Cash Flows
, on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of ASU No. 2016-15 is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The Company adopted ASU No. 2016-15 effective January 1, 2018 retrospectively with no material impact on the Company’s condensed consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the Emerging Issues Task Force)
(“ASU No. 2016-18”) which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flow. The Company adopted this guidance on January 1, 2018 retrospectively and as a result included restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts presented on the condensed consolidated statement of cash flows.
The effect of the changes made to the Company’s condensed consolidated statement of cash flow line items from the adoption of ASU No. 2016-18
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
As Previously Reported
|
|
Adjustments due to ASU No. 2016-18
|
|
As Adjusted
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Decrease in restricted cash and certificates of deposits
|
$
|
45
|
|
|
$
|
(45
|
)
|
|
$
|
—
|
|
NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
|
452,107
|
|
|
(45
|
)
|
|
452,062
|
|
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—Beginning of period
|
62,304
|
|
|
2,343
|
|
|
64,647
|
|
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—End of period
|
514,411
|
|
|
2,298
|
|
|
516,709
|
|
In March 2017, the FASB issued ASU No. 2017-07,
Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
(“ASU No. 2017-07”) which amends the guidance for the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. ASU No. 2017-07 requires entities to report non-service-cost components of net periodic benefit cost outside of income from operations. The Company adopted ASU No. 2017-07 effective January 1, 2018, retrospectively, which resulted in reclassifying net periodic pension benefit of
$23,000
and
$46,000
from selling, general, and administrative expenses to miscellaneous other income on the condensed consolidated statement of operations for the three and six months ended June 30, 2017, respectively.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU No. 2017-09”)
. ASU No. 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC Topic 718,
Compensation - Stock Compensation
. The Company adopted the amendments of ASU No. 2017-09 effective January 1, 2018 prospectively with no material impact on the Company’s condensed consolidated financial statements.
3. REVENUES
The application of the new revenue standard had the following impacts to the financial statement line items in the Company’s condensed consolidated financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
Six Months Ended June 30, 2018
|
|
As Reported
|
|
Balances without Adoption of ASC 606
|
|
Effect of Change
|
|
As Reported
|
|
Balances without Adoption of ASC 606
|
|
Effect of Change
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
Land sales
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
52
|
|
|
$
|
175
|
|
|
$
|
(123
|
)
|
Land sales—related party
|
221
|
|
|
138
|
|
|
83
|
|
|
442
|
|
|
387
|
|
|
55
|
|
Management services—related party
|
11,440
|
|
|
6,001
|
|
|
5,439
|
|
|
23,207
|
|
|
12,327
|
|
|
10,880
|
|
Operating properties
|
1,426
|
|
|
979
|
|
|
447
|
|
|
4,356
|
|
|
3,068
|
|
|
1,288
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
Land sales
|
52
|
|
|
52
|
|
|
—
|
|
|
90
|
|
|
29
|
|
|
61
|
|
Management services
|
6,763
|
|
|
3,042
|
|
|
3,721
|
|
|
13,852
|
|
|
6,411
|
|
|
7,441
|
|
Operating properties
|
1,107
|
|
|
797
|
|
|
310
|
|
|
3,497
|
|
|
2,847
|
|
|
650
|
|
EQUITY IN EARNINGS FROM UNCONSOLIDATED ENTITIES
|
9,003
|
|
|
6,646
|
|
|
2,357
|
|
|
5,396
|
|
|
4,107
|
|
|
1,289
|
|
NET LOSS
|
(11,303
|
)
|
|
(15,598
|
)
|
|
4,295
|
|
|
(25,600
|
)
|
|
(30,837
|
)
|
|
5,237
|
|
NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
|
(6,143
|
)
|
|
(8,723
|
)
|
|
2,580
|
|
|
(15,208
|
)
|
|
(18,319
|
)
|
|
3,111
|
|
NET LOSS ATTRIBUTABLE TO THE COMPANY
|
(5,160
|
)
|
|
(6,875
|
)
|
|
1,715
|
|
|
(10,392
|
)
|
|
(12,518
|
)
|
|
2,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
June 30, 2018
|
|
As Reported
|
|
Balances without Adoption of ASC 606
|
|
Effect of Change
|
ASSETS
|
|
|
|
|
|
Inventories
|
$
|
1,546,683
|
|
|
$
|
1,556,201
|
|
|
$
|
(9,518
|
)
|
Investment in unconsolidated entities
|
538,470
|
|
|
534,115
|
|
|
4,355
|
|
Intangible asset, net—related party
|
100,932
|
|
|
127,593
|
|
|
(26,661
|
)
|
Related party assets
|
53,416
|
|
|
4,023
|
|
|
49,393
|
|
Other assets
|
9,292
|
|
|
7,939
|
|
|
1,353
|
|
LIABILITIES
|
|
|
|
|
|
Accounts payable and other liabilities
|
168,128
|
|
|
169,729
|
|
|
(1,601
|
)
|
Related party liabilities
|
177,491
|
|
|
186,851
|
|
|
(9,360
|
)
|
CAPITAL
|
|
|
|
|
|
Retained earnings
|
58,133
|
|
|
45,323
|
|
|
12,810
|
|
Noncontrolling interest
|
1,283,241
|
|
|
1,266,169
|
|
|
17,072
|
|
As a result of applying the new revenue standard, there was no impact to the Company’s operating, investing or financing activities in the condensed consolidated statement of cash flows other than a change to net loss and therefore a corresponding impact on the reconciling items to arrive at the net cash used in operating activities.
Revenues are recognized when control of the promised goods (i.e. land) or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
At contract inception, the Company assesses the goods and services promised in its contract with its customers and identifies a performance obligation for each promise to transfer to the customer a good or service (or a series of services) that is distinct. Identified performance obligations are assessed by considering implicit and explicitly stated promises. For the distinct performance obligation related to land sales, the Company typically satisfies the performance obligations at a point in time, upon transferring control of the land (when title passes at the close of escrow). The customer is able to direct the use of, control, and obtain substantially all of the benefits from the land when title passes. For the distinct performance obligation related to management services, which is comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer, the Company typically satisfies the performance obligations over time as services are rendered. The customer consumes the benefits of the management services as the performance obligation is satisfied over time. The following tables present the Company’s consolidated revenues disaggregated by revenue source and reporting segment (see Note 14) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
Newhall
|
|
San Francisco
|
|
Great Park
|
|
Commercial
|
|
Total
|
Land sales
|
$
|
3
|
|
|
$
|
221
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
224
|
|
Management services
|
—
|
|
|
1,432
|
|
|
9,918
|
|
|
90
|
|
|
11,440
|
|
Operating properties
|
748
|
|
|
187
|
|
|
—
|
|
|
—
|
|
|
935
|
|
|
751
|
|
|
1,840
|
|
|
9,918
|
|
|
90
|
|
|
12,599
|
|
Operating properties leasing revenues
|
491
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
491
|
|
|
$
|
1,242
|
|
|
$
|
1,840
|
|
|
$
|
9,918
|
|
|
$
|
90
|
|
|
$
|
13,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
Newhall
|
|
San Francisco
|
|
Great Park
|
|
Commercial
|
|
Total
|
Land sales
|
$
|
52
|
|
|
$
|
442
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
494
|
|
Management services
|
—
|
|
|
3,052
|
|
|
19,975
|
|
|
180
|
|
|
23,207
|
|
Operating properties
|
2,791
|
|
|
368
|
|
|
—
|
|
|
—
|
|
|
3,159
|
|
|
2,843
|
|
|
3,862
|
|
|
19,975
|
|
|
180
|
|
|
26,860
|
|
Operating properties leasing revenues
|
1,197
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,197
|
|
|
$
|
4,040
|
|
|
$
|
3,862
|
|
|
$
|
19,975
|
|
|
$
|
180
|
|
|
$
|
28,057
|
|
Contract balances are recorded on the condensed consolidated balance sheet in related party assets and other assets for receivables from customers and contract assets (unbilled receivables) depending on if the customer is a related party. Similarly, contract liabilities (deferred revenue) are included in accounts payable and other liabilities and related party liabilities. When the timing of the Company’s satisfaction of a performance obligation is different from the timing of the payments made by customers, the Company recognizes either a contract asset or a contract liability. Contract assets typically consist of the Company’s estimate of contingent or variable consideration that has been included in the transaction price and recognized as revenue before the contractual payment is due
. Contract liabilities typically consist of payments received by the Company prior to the Company satisfying the associated performance obligation.
Consideration in the form of contingent incentive compensation from the Company’s development management agreement with the Great Park Venture is recognized as revenue as services are provided over the expected contract term, although contractual payments are due in connection with distributions made to the members of the Great Park Venture. The Company includes in the transaction price an estimate of incentive compensation only to the extent that a significant reversal of revenue is not probable. In some of its development management agreements, the Company receives compensation equal to the actual general and administrative costs incurred by the Company’s project team. In these circumstances, the Company acts as the principal and recognizes management fee revenues on these reimbursements in the same period that these costs are incurred because the amount to which the Company has the right to invoice corresponds directly with the value consumed by the customer for the Company’s performance to date.
Additionally, the Company’s land sale contracts may include contingent amounts of variable consideration in the form of revenue or profit participation and marketing fees received from the homebuilders in amounts that are determined from the sales price or profitability of the sold homes. Estimates of such variable consideration that the Company expects to be entitled to receive from the homebuilder, if any, is recognized as revenue and a contract asset at the time of land sale, although payments are received in future periods when homebuilders complete home sales. Changes in estimates of variable components of transaction prices, including estimates of variable consideration that are constrained, could result in cumulative catch-up adjustments to revenue that may result in an increase or decrease to contract assets in future periods.
The opening and closing balances of the Company’s contract assets for the
six months ended
June 30, 2018
were
$39.0 million
and
$50.9 million
, respectively. The increase of
$11.9 million
between the opening and closing balances of the Company’s contract assets primarily results 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 Company’s opening and closing contract liabilities for the
six months ended
June 30, 2018
were insignificant.
As of
June 30, 2018
, the aggregate amount of the transaction price allocated to the Company’s partially unsatisfied performance obligations associated with the development management agreement with the Great Park Venture was
$71.2 million
. The Company will recognize this revenue ratably as services are provided over the expected contract term, which terminates in December 2021, unless extended by mutual agreement by both the Company and the Great Park Venture. At each reporting period the Company will reassess the estimate of the amount of variable consideration the Company is expected to be entitled to such that it is probable that a significant reversal will not occur. Significant judgment is involved in management’s estimate of the amount of variable consideration included in the transaction price. In making this estimate, management utilizes projected cash flows of the operations of the Great Park Venture. These cash flows are significantly affected by estimates and assumptions related to market supply and demand, the local economy, projected pace of sales of homesites, pricing and price appreciation over the estimated selling period, the length of the estimated development and selling periods, remaining development, general, and administrative costs, and other factors. When changes in the estimate occur, a cumulative catch-up will be recorded in the period and the transaction price allocated to the unsatisfied performance obligation will be adjusted. The Company applies the disclosure exemptions associated with remaining performance obligations for contracts with an original expected term of one year or less, contracts for which revenue is recognized in proportion to the amount of services performed and variable consideration that is allocated to wholly unsatisfied performance obligations for services that form part of a series of services.
4.
ACQUISITIONS AND DISPOSALS
On May 2, 2016, the Company completed the Formation Transactions pursuant to the Contribution and Sale Agreement (see Note 1), in which the Company acquired a controlling financial interest in the San Francisco Venture and the Management Company. The acquisitions and the Company’s concurrent investment in the Great Park Venture (see Note 5) transformed the Company into an owner, manager and developer of real estate at three locations. In accordance with ASC 805, the Company has recorded the acquired assets (including identifiable intangible assets) and liabilities at their respective fair values as of the date of the Contribution and Sale Agreement.
The Company was a party to a cost sharing agreement related to the transactions that were consummated through the Contribution and Sale Agreement in which financial advisory, legal, accounting, tax and other consulting services were shared between the Company, the San Francisco Venture, the Great Park Venture and the Management Company. The Management Company acted as the administrative agent for all the parties.
The San Francisco Venture Acquisition
On May 2, 2016, immediately prior to completion of the Formation Transactions, the San Francisco Venture completed a separation transaction (the “Separation Transaction”) pursuant to an Amended and Restated Separation and Distribution Agreement (“Separation Agreement”) in which the equity interests in a subsidiary of the San Francisco Venture known as CPHP Development, LLC (“CPHP”) were distributed directly to the members of the San Francisco Venture: (i) an affiliate of Lennar and (ii) an affiliate of Castlelake, LP (“Castlelake”). The principal terms of the Separation Agreement include the following:
• CPHP was transferred certain acres of land where homes were being built, as well as all responsibility for current and future residential construction on the land;
• Once a final subdivision map is recorded, title to a parking structure parcel at Candlestick Point (the “CP Parking Parcel”) will be conveyed to CPHP, and CPHP will assume the obligation to construct the parking structure and certain other improvements at Candlestick Point;
• CPHP was transferred the membership interest in Candlestick Retail Member, LLC, (“Mall Venture Member”), the entity that has entered into a joint venture (“Mall Venture”) with CAM Candlestick LLC (the “Macerich Member”) to build a fashion outlet retail shopping center (“Retail Project”) above and adjacent to the parking structure that CPHP is to construct on the CP Parking Parcel;
• Once a final subdivision map is recorded, the San Francisco Venture will convey to the Mall Venture the property on which the Retail Project will be built (the “Retail Project Property”); and
• CPHP assumed all of the vertical construction loans and EB-5 loan liabilities of the San Francisco Venture, subject to a reimbursement agreement for the portion of the EB-5 loans that were used to fund development of the portions of Candlestick Point and The San Francisco Shipyard that were not transferred to CPHP.
Concurrent with and pursuant to the terms and conditions of the Contribution and Sale Agreement, the limited liability company agreement of the San Francisco Venture was amended and restated to reflect among other things (1) the conversion of the existing members’ interest into Class A units of the San Francisco Venture that are redeemable, at the holder’s option, subject to certain conditions, for Class A Common Units of the Operating Company, (2) the creation of Class B units of the San Francisco Venture and (3) the appointment of the Operating Company as the manager of the San Francisco Venture. In exchange for
378,578
of its Class A Common Units, the Operating Company acquired
378,578
Class A units of the San Francisco Venture that automatically converted into an equal number of Class B units of the San Francisco Venture. As the holder of all the outstanding Class B units of the San Francisco Venture, the Operating Company owns interests that entitle it to receive
99%
of all distributions from the San Francisco Venture after the holders of Class A units of the San Francisco Venture have received distributions equivalent to the distributions, if any, paid on the Class A Common Units of the Operating Company. The Company has a controlling financial interest and consolidates the accounts of the San Francisco Venture and reports noncontrolling interest attributed to the outstanding Class A units of the San Francisco Venture.
The equity issued for the San Francisco Venture consisted of the following (in thousands, except unit and per unit amounts):
|
|
|
|
|
Class A Common Units of the Operating Company
|
378,578
|
|
Class A units of the San Francisco Venture (exchangeable for Class A Common Units in the Operating Company)
|
37,479,205
|
|
Total units issued/issuable in consideration
|
37,857,783
|
|
Estimated fair value per Class A Common Unit of the Operating Company
|
$
|
23.61
|
|
Total equity consideration
|
$
|
893,856
|
|
Add: contingent consideration
|
64,870
|
|
Less: capital commitment from seller
|
(120,000
|
)
|
Total consideration issued for the San Francisco Venture
|
$
|
838,726
|
|
The estimated fair value per Class A Common Unit of the Operating Company was determined using a discounted cash flow method projected for the Operating Company to determine a per unit enterprise value as of the acquisition date. As the Class A units of the San Francisco Venture are exchangeable on a
one
-for-one basis for Class A Common Units of the Operating Company, it was determined that the value of a Class A unit of the San Francisco Venture is substantially equal to the value of a Class A Common Unit of the Operating Company. The fair value of the noncontrolling interest represented by the Class A units of the San Francisco Venture held by affiliates of Lennar and Castlelake is calculated as the product of the value of a Class A unit of the San Francisco Venture and the number of Class A units of the San Francisco Venture outstanding.
Contingent consideration consists of the San Francisco Venture’s obligation (through a subsidiary) to convey the Retail Project Property to the Mall Venture and the CP Parking Parcel to CPHP. The Retail Project Property is to be conveyed pursuant to a development and acquisition agreement, dated November 13, 2014, between the Mall Venture and the San Francisco Venture’s subsidiary (the “Mall DAA”). The former owners of the San Francisco Venture retained the rights to
49.9%
of the equity ownership in the Mall Venture through the Separation Agreement. Therefore, the conveyance of the Retail Project Property to the Mall Venture represents additional consideration to the former owners, contingent upon the San Francisco Venture obtaining the appropriate governmental approvals required to subdivide and convey the Retail Project Property.
In connection with the Separation Transaction, the former owners agreed to make an aggregate capital commitment to the San Francisco Venture of
$120.0 million
, payable to the San Francisco Venture in
four
equal installments, with the first installment paid on May 2, 2016 and the second, third and fourth installments payable within
90
,
180
and
270
days thereafter. The second and third installments were paid and received by the San Francisco Venture on August 5, 2016 and November 3, 2016, respectively, and the fourth installment was received on February 2, 2017. The
$120.0 million
capital commitment from the selling members was determined to be an adjustment to purchase consideration since the amount is a cash inflow to the Company from the former owners of the San Francisco Venture in relation to the acquisition, thereby reducing the fair value of the consideration.
The estimated fair value of the assets acquired and liabilities assumed, as well as the fair value of the noncontrolling interest in the San Francisco Venture as of the acquisition date, is as follows (in thousands):
|
|
|
|
|
Assets acquired:
|
|
Inventories
|
$
|
1,038,154
|
|
Other assets
|
827
|
|
Liabilities assumed:
|
|
Macerich Note
|
(65,130
|
)
|
Accounts payable
|
(17,715
|
)
|
Related party liabilities
|
(117,410
|
)
|
Net assets acquired
|
$
|
838,726
|
|
Adjustment to equity consideration, net (see table above)
|
55,130
|
|
|
$
|
893,856
|
|
Noncontrolling interest in the San Francisco Venture
|
$
|
884,917
|
|
Inventories consist of land held for development and the right to receive land from the Office of Community Investment and Infrastructure, the Successor to the Redevelopment Agency of the City and County of San Francisco (the “San Francisco Agency”), in accordance with a disposition and development agreement between the San Francisco Venture’s subsidiary and the San Francisco Agency.
Accounts payable consists of payables related to normal business operations. Related party liabilities consist of (i)
$102.7 million
in EB-5 loan reimbursements to CPHP or its subsidiaries, pursuant to reimbursement agreements that the San Francisco Venture entered into as of May 2, 2016 to reimburse CPHP or its subsidiaries for the proceeds of the EB-5 loans that were used to fund development of the portions of Candlestick Point and The San Francisco Shipyard that were not transferred to CPHP; and (ii) a
$14.6 million
closing cash adjustment payable to CPHP. The Macerich Note is a
$65.1 million
loan from an affiliate of the Macerich Member.
Management Company Acquisition
The Management Company was formed in 2009 as a joint venture between Emile Haddad, the Company’s Chairman and Chief Executive Officer, and an affiliate of Lennar. Upon its formation, the Management Company was engaged as an independent contractor to supervise the day-to-day affairs of the Holding Company and the assets of its subsidiaries. The Management Company received a
2.48%
ownership interest in the Company’s subsidiary, FPL, in connection with its engagement as development manager. The Management Company has also acted as development manager for the Great Park Venture, under the terms of the development management agreement. Prior to the Formation Transactions, the Management Company also held an ownership interest in the Great Park Venture through an investment in a joint venture with an affiliate of Castlelake (“FPC-HF Venture I”). In 2014, the Management Company sold the rights to
12.5%
of all incentive compensation under the development management agreement to FPC-HF Venture I in exchange for its ownership interest in FPC-HF Venture I. Concurrent with and pursuant to the terms and conditions of the Contribution and Sale Agreement, the Management Company’s limited partnership agreement was amended and restated. Among other things, the principal organizational changes that occurred were as follows:
• Distribution of the Management Company’s ownership interest in FPC-HF Venture I (see Note 5) to its shareholders, Emile Haddad and an affiliate of Lennar;
• The partnership interests were converted into
two
classes of partnership interests, designated as Class A interests and Class B interests. Holders of the Management Company’s Class B interests are entitled to receive distributions from the Management Company equal to the amount of any incentive compensation payments the Management Company receives under the development management agreement with the Great Park Venture that are characterized as “Legacy Incentive Compensation.” Holders of Class A interests are entitled to all other distributions; and
• Admission of FPC-HF Venture I as a
12.5%
holder of the Management Company’s Class B interests in exchange for FPC-HF Venture I’s contribution of its right to
12.5%
of the Legacy Incentive Compensation.
By acquiring all of the stock of FP Inc. and all of the Class A interests of FP LP, the Company obtained a controlling financial interest in the Management Company and is able to direct all business decisions of the Management Company.
The equity issued for the Management Company consisted of the following (in thousands, except unit/share and per unit amounts):
|
|
|
|
|
Class A common shares of the Company
|
798,161
|
|
Class A Common Units of the Operating Company
|
6,549,629
|
|
Total units/shares issued in consideration
|
7,347,790
|
|
Estimated fair value per Class A Common Unit of the Operating Company and Class A common share of the Company
|
$
|
23.61
|
|
Total equity consideration
|
$
|
173,488
|
|
Add: available cash distribution
|
450
|
|
Total consideration issued for the Management Company
|
$
|
173,938
|
|
A Class A common share of the Company and a Class A Common Unit of the Operating Company issued as consideration were each valued at
$23.61
.
The estimated total purchase price was allocated to the Management Company’s assets and liabilities based upon fair values as determined by the Company, as follows (in thousands):
|
|
|
|
|
Assets acquired:
|
|
Investment in FPL
|
$
|
70,000
|
|
Intangible asset
|
129,705
|
|
Cash
|
3,664
|
|
Legacy Incentive Compensation receivable from related party
|
56,232
|
|
Related party receivables
|
5,282
|
|
Prepaid expenses and other current assets
|
328
|
|
Liabilities assumed:
|
|
Other liabilities
|
(2,397
|
)
|
Related party liabilities
|
(81,996
|
)
|
Accrued employee benefits
|
(6,880
|
)
|
Net assets acquired
|
$
|
173,938
|
|
The intangible asset is a contract asset resulting from the incentive compensation provisions of the development management agreement with the Great Park Venture. The agreement has an original term commencing on December 29, 2010 and ending on December 31, 2021, with options to renew for three additional years and then two additional years. 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 investment in FPL, which was stepped up to fair value, is eliminated in consolidation as FPL is a consolidated subsidiary of the Company. Related party liabilities are comprised of the Class B distribution rights then held by Emile Haddad, an affiliate of Lennar and FPC-HF Venture I. The Class B interests were determined to not be a substantive form of equity because the interests only entitle the holders to the Legacy Incentive Compensation payments, and does not expose the holders to the net assets or residual interest of the Management Company. Class B distributions will be made when the Management Company receives Legacy Incentive Compensation payments under the development management agreement with the Great Park Venture. As of
June 30, 2018
, the Management Company had received
$58.3 million
of the Legacy Incentive Compensation and made distributions in the same amount to the holders of Class B interests. Related party liabilities also includes an obligation to the Operating Company for
$14.1 million
, representing
12.5%
of the Non-Legacy
Incentive Compensation under the development management agreement with the Great Park Venture that the Management Company previously sold to FPC-HF Venture I and that the Operating Company acquired from FPC-HF Venture I in connection with the Contribution and Sale Agreement. This obligation and the Operating Company’s acquired asset are eliminated in the accompanying condensed consolidated balance sheet as of
June 30, 2018
.
Tournament Players Club at Valencia Golf Course Disposal
In January 2018, the Tournament Players Club at Valencia Golf Course was sold for net cash proceeds of
$5.7 million
, and the buyer’s assumption of certain liabilities, including certain club membership related liabilities. The Company recognized a gain of
$6.7 million
as a result of the sale and such gain is included in miscellaneous other income in the condensed consolidated statement of operations for the
six months ended
June 30, 2018
. The property was operated by the Company as an amenity to the Newhall segment’s fully developed Valencia community and the gain on the sale is included in the Newhall segment’s results for the
six months ended
June 30, 2018
.
5.
INVESTMENT IN UNCONSOLIDATED ENTITIES
Great Park Venture
On May 2, 2016, concurrent with and pursuant to the terms and conditions of the Contribution and Sale Agreement, the Great Park Venture’s limited liability company agreement was amended and restated and the existing interests were split into two classes of interests—“Percentage Interests” and “Legacy Interests.” The pre-Formation Transaction owners of the Great Park Venture retained the Legacy Interests, which entitle them 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 are entitled to receive all other distributions. In April 2018, the Great Park Venture made a distribution to the holders of Legacy Interests of approximately
$235.0 million
. As of
June 30, 2018
, the Great Park Venture has made distributions to the holders of Legacy Interests in the aggregate amount of
$355.0 million
. Pursuant to the Contribution and Sale Agreement, the Operating Company acquired
37.5%
of the Percentage Interests in exchange for issuing
17,749,756
Class A Common Units in the Operating Company to an affiliate of Lennar and to FPC-HF Venture I. Great Park Venture is the owner of Great Park Neighborhoods, a mixed-use, master planned community located in Orange County, California. The Company, through its acquisition of the Management Company, has been engaged to manage the planning, development and sale of land at the Great Park Neighborhoods and supervise the day-to-day affairs of the Great Park Venture. The Great Park Venture is managed by the members who hold Percentage Interests. The Company does not control the actions of the Great Park Venture.
The cost of the Company’s initial investment in the Great Park Venture was
$114.2 million
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 and liabilities that gave rise to the basis difference are sold, settled or amortized.
The following table summarizes the statement of operations of the Great Park Venture for the
six months ended
June 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
Land sale revenues
|
$
|
171,013
|
|
|
$
|
7,180
|
|
Cost of land sales
|
(118,113
|
)
|
|
(3,193
|
)
|
Other costs and expenses
|
(30,169
|
)
|
|
(15,123
|
)
|
Net income (loss) of Great Park Venture
|
$
|
22,731
|
|
|
$
|
(11,136
|
)
|
The Company’s share of net income (loss)
|
$
|
8,524
|
|
|
$
|
(4,176
|
)
|
Basis difference amortization
|
(3,652
|
)
|
|
(1,065
|
)
|
Equity in earnings (loss) from Great Park Venture
|
$
|
4,872
|
|
|
$
|
(5,241
|
)
|
The following table summarizes the balance sheet data of the Great Park Venture and the Company’s investment balance as of
June 30, 2018
and
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Inventories
|
$
|
1,023,017
|
|
|
$
|
1,089,513
|
|
Cash and cash equivalents
|
118,469
|
|
|
336,313
|
|
Receivable and other assets
|
37,108
|
|
|
21,778
|
|
Total assets
|
$
|
1,178,594
|
|
|
$
|
1,447,604
|
|
Accounts payable and other liabilities
|
$
|
157,525
|
|
|
$
|
225,588
|
|
Redeemable Legacy Interests
|
209,967
|
|
|
445,000
|
|
Capital (Percentage Interest)
|
811,102
|
|
|
777,016
|
|
Total liabilities and capital
|
$
|
1,178,594
|
|
|
$
|
1,447,604
|
|
The Company’s share of capital in Great Park Venture
|
$
|
304,163
|
|
|
$
|
291,381
|
|
Unamortized basis difference
|
127,267
|
|
|
132,111
|
|
The Company’s investment in the Great Park Venture
|
$
|
431,430
|
|
|
$
|
423,492
|
|
Gateway Commercial Venture
On August 4, 2017, the Company entered into the Limited Liability Company Agreement of the Gateway Commercial Venture, made a capital contribution of
$106.5 million
to the Gateway Commercial Venture, and received a
75%
interest in the venture. 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.
On August 10, 2017, through its wholly owned subsidiaries, the Gateway Commercial Venture completed the purchase of the Five Point Gateway Campus located in Irvine, California. The purchase price of
$443.0 million
was funded using capital contributions by the members of the Gateway Commercial Venture and
$291.2 million
in debt financing. The financing arrangement also provides for an additional
$48.0 million
to be borrowed for the cost of tenant improvements, leasing expenditures and certain capital expenditures. The debt obtained by the Gateway Commercial Venture is non-recourse to the Company other than in the case of customary “bad acts” or bankruptcy or insolvency events.
The following table summarizes the statement of operations of the Gateway Commercial Venture for the
six months ended
June 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2018
|
Rental revenues
|
|
$
|
12,946
|
|
Rental operating and other expenses
|
|
(1,868
|
)
|
Depreciation and amortization
|
|
(5,669
|
)
|
Interest expense
|
|
(4,710
|
)
|
Net income of Gateway Commercial Venture
|
|
$
|
699
|
|
The Company’s share of net income
|
|
$
|
524
|
|
The following table summarizes the balance sheet data of the Gateway Commercial Venture and the Company’s investment balance as of
June 30, 2018
and
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Real estate and related intangible assets, net
|
$
|
446,787
|
|
|
$
|
448,795
|
|
Other assets
|
10,280
|
|
|
7,211
|
|
Total assets
|
$
|
457,067
|
|
|
$
|
456,006
|
|
Notes payable, net
|
$
|
287,674
|
|
|
$
|
286,795
|
|
Other liabilities
|
26,673
|
|
|
27,190
|
|
Members’ capital
|
142,720
|
|
|
142,021
|
|
Total liabilities and capital
|
$
|
457,067
|
|
|
$
|
456,006
|
|
The Company’s investment
|
$
|
107,040
|
|
|
$
|
106,516
|
|
6.
NONCONTROLLING INTERESTS
The Holding Company’s wholly owned subsidiary is the managing general partner of the Operating Company. At
June 30, 2018
, the Holding Company and its wholly owned subsidiary owned approximately
61.5%
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
38.5%
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 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 San Francisco Venture has
two
classes of units—Class A units and Class B 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 and affiliates of Castlelake. The Class A units of the San Francisco Venture are intended to be 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.
Net (loss) income attributable to the noncontrolling interests on the 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.
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 well as the total net assets of the Company. As a result, all equity transactions result in an allocation 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
six months ended
June 30, 2018
, 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 and exchanges of Class A Common Units of the Operating Company for Class A common shares. During the
six months ended
June 30, 2017
, the Holding Company's ownership interest in the Operating Company changed as a result of the Holding Company acquiring Class A Common Units of the Operating Company with the proceeds of the Holding Company's IPO, the sale of Class A Common Units of the Operating Company in a private placement with Lennar, and equity transactions related to the Company's share-based compensation plan.
7.
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 tax receivable agreement (“TRA”) related obligation, which was
$168.0 million
and
$152.5 million
at
June 30, 2018
and
December 31, 2017
, respectively. The Operating Company has investments in and consolidates the assets and liabilities of the San Francisco Venture, Five Point Communities, 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 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
June 30, 2018
, the San Francisco Venture had total combined assets of
$1,114.3 million
, primarily comprised of
$1,096.6 million
of inventories,
$7.4 million
in related party assets and
$9.0 million
in cash and total combined liabilities of
$256.6 million
including
$167.6 million
in related party liabilities and
$65.1 million
in notes payable.
As of
December 31, 2017
, the San Francisco Venture had total combined assets of
$1,074.1 million
, primarily comprised of
$1,063.9 million
of inventories and
$8.4 million
in cash and total combined liabilities of
$269.2 million
including
$177.4 million
in related party liabilities and
$65.1 million
in notes payable.
Those assets are owned by, and those liabilities are obligations of, the San Francisco Venture, not the Company. The San Francisco Venture is not a guarantor 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 debt. 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.
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
June 30, 2018
, FP LP and FPL had combined assets of
$631.4 million
, primarily comprised of
$450.1 million
of inventories,
$100.9 million
of intangibles,
$46.0 million
in related party assets and
$0.5 million
in cash, and total combined liabilities of
$130.2 million
, including
$120.7 million
in accounts payable and other liabilities and
$9.5 million
in related party liabilities.
As of
December 31, 2017
, FP LP and FPL had combined assets of
$543.5 million
, primarily comprised of
$361.9 million
of inventories,
$127.6 million
of intangibles,
$3.1 million
in related party assets and
$12.3 million
in cash, and total combined liabilities of
$131.0 million
, including
$117.1 million
in accounts payable and other liabilities and
$9.1 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
six months ended
June 30, 2018
and
2017
, respectively, there were no VIEs that were deconsolidated.
8.
INTANGIBLE ASSET, NET—RELATED PARTY
In connection with the Company’s acquisition of the Management Company (see Note 4), the Company acquired an intangible asset related to the contract value of the incentive compensation provisions of the Management Company’s development management agreement with the Great Park Venture.
The carrying amount and accumulated amortization of the intangible asset as of
June 30, 2018
and
December 31, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Gross carrying amount
|
$
|
129,705
|
|
|
$
|
129,705
|
|
Accumulated amortization
|
(28,773
|
)
|
|
(2,112
|
)
|
Net book value
|
$
|
100,932
|
|
|
$
|
127,593
|
|
For the three and
six months ended
June 30, 2018
, the Company recorded
$3.7 million
and
$7.4 million
of amortization expense, which is included in the cost of management services in the accompanying condensed consolidated statement of operations, as a result of revenue recognition attributable to incentive compensation.
No
amortization expense was recorded for the three and
six months ended
June 30, 2017
. Additionally, in connection with the transition adjustment recorded for the adoption of ASU No. 2014-09 on January 1, 2018, the Company recorded an increase to accumulated amortization of
$19.2 million
(see Note 2).
9. RELATED PARTY TRANSACTIONS
Related party assets and liabilities included in the Company’s condensed consolidated balance sheets as of
June 30, 2018
and
December 31, 2017
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Related Party Assets:
|
|
|
|
Contract assets (see Note 3)
|
$
|
49,393
|
|
|
$
|
—
|
|
Other
|
4,023
|
|
|
3,158
|
|
|
$
|
53,416
|
|
|
$
|
3,158
|
|
Related Party Liabilities:
|
|
|
|
EB-5 loan reimbursements
|
$
|
102,692
|
|
|
$
|
102,692
|
|
Contingent consideration—Mall Venture project property
|
64,870
|
|
|
64,870
|
|
Deferred land sale revenue
|
—
|
|
|
9,860
|
|
Payable to holders of Management Company’s Class B interests
|
9,000
|
|
|
9,000
|
|
Other
|
929
|
|
|
248
|
|
|
$
|
177,491
|
|
|
$
|
186,670
|
|
In June 2018, the Company purchased an indirect interest in rights to certain Legacy Interests in the Great Park Venture that were held by Emile Haddad. At June 30, 2018, the carrying value of the purchased interests was
$1.8 million
and is included in Other related party assets in the table above.
10. NOTES PAYABLE, NET
At
June 30, 2018
and
December 31, 2017
, notes payable consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
7.875% Senior Notes due 2025
|
$
|
500,000
|
|
|
$
|
500,000
|
|
Macerich Note
|
65,130
|
|
|
65,130
|
|
Settlement Note
|
—
|
|
|
5,000
|
|
Unamortized debt issuance costs and discount
|
(8,721
|
)
|
|
(9,512
|
)
|
|
$
|
556,409
|
|
|
$
|
560,618
|
|
In April 2018, the Company made the final principal payment of
$5.0 million
on the settlement note.
11.
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 and all the holders of Class A units of the San Francisco Venture (as parties to the TRA, the “TRA Parties”). At
June 30, 2018
and
December 31, 2017
, the Company’s condensed consolidated balance sheets include a liability of
$168.0 million
and
$152.5 million
, respectively, for payments expected to be made under certain components of the TRA which the Company deems to be probable and estimable. Management deems a TRA payment related to the benefits expected to be received by the Company under the application of Section 704(c) and Section 743 of the Internal Revenue Code of 1986, as amended, to be probable and estimable when an event occurs that results in the Company measuring the Operating Company’s directly or indirectly held property at fair value in the Company’s consolidated balance sheet or the sale of such property at fair value. Either of these activities are indicators that the difference between the fair market value of the property and the adjusted tax basis has been or will be realized, resulting in special allocations of income, gain, loss or deduction that are likely to reduce the amount of income taxes that the Company would otherwise pay. The Company may record adjustments to TRA liabilities related to properties not currently held at fair value when those properties are recognized or realized at fair value. Furthermore, 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
six months ended
June 30, 2018
and
2017
.
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.
Newhall Ranch Project Approval Settlement
In September 2017, the Company reached a settlement (the “Newhall Settlement”) with key national and state environmental and Native American organizations that were petitioners (the “Settling Petitioners”) in various legal challenges to Newhall Ranch’s regulatory approvals and permits. As of
June 30, 2018
, the Company has a liability balance of
$39.2 million
associated with certain obligations of the Newhall 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
June 30, 2018
, the remaining estimated maximum potential amount of monetary payments subject to the guaranty was
$47.2 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 approvals for Newhall Ranch. See “Legal Proceedings” below.
Agreement Regarding Mall Venture
On May 2, 2016, the Company entered into an agreement with CPHP pursuant to which, upon completion of the Retail Project, CPHP will contribute all of its interests in the Mall Venture Member to the Operating Company in exchange for
2,917,827
Class A Common Units of the Operating Company. Additionally, CPHP will purchase an equal amount of Class B common shares from the Holding Company at a price of
$0.00633
per share. If the Company or CPHP fail to achieve certain milestones, including the conveyance to the Mall Venture of the Retail Project Property on or prior to December 31, 2017, subject to certain extensions, Macerich will have the right to terminate the joint venture, require the Company to repay the
$65.1 million
Macerich Note and to pay
50%
of certain termination fees (the remainder would be paid by CPHP). The additional termination fees, in addition to other amounts that are not determinable as of
June 30, 2018
, include an amount equal to the incurred but unpaid interest on the Macerich Note. The unpaid interest totaled approximately
$8.4 million
as of
June 30, 2018
. However, the Company would no longer be obligated to transfer the Retail Project Property to the Retail Project or the CP
Parking Parcel to CPHP. Instead, the Company would be obligated to issue
436,498
Class A Common Units of the Operating Company to CPHP, and CPHP would be obligated to purchase an equal number of Class B common shares from the Holding Company at a price of
$0.00633
per share. The Retail Project Property had not been conveyed to the Mall Venture as of
June 30, 2018
. In light of the rapidly evolving retail landscape, the Company and the members of the Mall Venture have been evaluating the viability of the mall at the site, and the Company is currently exploring potential alternative configurations and/or uses for the site. At this time, the development plan for the site and any related impact on the Mall Venture are uncertain.
Candlestick Point Development Agreement
On May 2, 2016, the Company entered into a development agreement with CPHP in which among other things, CPHP agreed to be responsible for all design and construction costs (up to
$240.0 million
) associated with the parking structure to be built on the CP Parking Parcel, and the Company agreed to reimburse CPHP for design and construction costs in excess of
$240.0 million
. Additionally, the Company agreed to remit to CPHP up to
$25.0 million
the Company realizes from CFD proceeds at Candlestick Point following completion of the parking structure. However, such obligation is subject to a dollar-for-dollar reduction by any amounts the Company pays for costs in excess of
$240.0 million
on the parking structure. Depending upon the final development plans for the Retail Project Property, the Company’s development agreement with CPHP may be modified or terminated. See “Agreement Regarding Mall Venture” above.
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
$73.5 million
and
$79.9 million
as of
June 30, 2018
and
December 31, 2017
, respectively.
Candlestick Point and The San Francisco Shipyard Disposition and Development Agreement
The San Francisco Venture is a party to a disposition and development agreement with the San Francisco Agency in which the San Francisco Agency has agreed to convey portions of Candlestick Point 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 Point and The San Francisco Shipyard if certain thresholds are met. As of
June 30, 2018
the thresholds had not been met.
At June 30, 2018, the San Francisco Venture 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 each of
June 30, 2018
and
December 31, 2017
, the Company had outstanding letters of credit totaling
$2.4 million
. These letters of credit were issued to secure various development and financial obligations. At each of
June 30, 2018
and
December 31, 2017
, 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
California Department of Fish and Wildlife Permits
In January 2011, petitioners Center for Biological Diversity, California Native Plant Society, and Wishtoyo Foundation/Ventura Coastkeeper, Santa Clarita Organization for Planning and the Environment (“SCOPE”) and Friends of the Santa Clara River filed a complaint in Los Angeles County Superior Court (“Superior Court”) challenging the validity of certain aspects of the environmental impact report (“EIR”) portion of the EIR/
Environmental Impact Statement (“EIR/EIS”) for the Newhall Ranch project. In November 2015, following lower court proceedings, the California Supreme Court (“Supreme Court”) reversed the Court of Appeal’s judgment on three issues raised in the case, namely: (i) the EIR’s greenhouse gas (“GHG”) emissions significance findings, (ii) the EIR’s mitigation measures for a protected fish species (“Stickleback”), and (iii) the timeliness of public comments on impacts to cultural resources and another sensitive fish species; and remanded to the Court of Appeal for reconsideration and new decision. In July 2016, after the remand, the Court of Appeal issued a new decision in favor of California Department of Fish and Wildlife (“CDFW”) and the Company as to the public comment issues. After further proceedings, the Court of Appeal remitted the case to the trial court, and that court issued the judgment and writ of mandate proposed by the CDFW as to the GHG and Stickleback issues. In February 2017, petitioners filed a notice of appeal challenging the scope of the trial court’s judgment and writ. In the interim, and in response to the Supreme Court’s decision, CDFW conducted additional analysis on the GHG and Stickleback issues and, in June 2017, reapproved the EIR and Newhall Ranch project. Thereafter, the Court of Appeal issued an opinion affirming the scope of the trial court’s judgment and writ in favor of CDFW and the Company.
In September 2017, petitioners Center for Biological Diversity, California Native Plant Society, and Wishtoyo Foundation/Ventura Coastkeeper (collectively, “Settling Petitioners”) settled all of their respective claims in the case, leaving only two petitioners, SCOPE and Friends of the Santa Clara River (collectively, “Non-Settling Petitioners”). In October 2017, the two Non-Settling Petitioners objected to CDFW’s June 2017 reapproval of the Newhall Ranch EIR and project. In March 2018, the Supreme Court denied the Non-Settling Petitioners’ petition for review. In July 2018, the trial court entered its judgment at CDFW’s request discharging the trial court’s earlier writ finding that CDFW has complied with the Court’s writ.
Landmark Village and Mission Village
The Los Angeles County Board of Supervisors (“BOS”) approved the Newhall Ranch Landmark Village and Mission Village EIRs and permits in late 2011 and 2012. In 2012, petitioners filed two petitions (one for each village development) in the Superior Court challenging such approvals under certain state environmental and planning and zoning laws. In 2014, the Superior Court issued decisions in favor of the County and the Company, and in 2015, the Court of Appeal affirmed the Superior Court’s decisions in full. Petitioners then filed a petition for review, and in 2015, the Supreme Court granted petitioners’ request to review Los Angeles County’s GHG analysis, but ordered that further proceedings in the two actions be deferred pending disposition of the related GHG issue in the CDFW action noted above.
After the Supreme Court decision invalidating the GHG findings in the related CDFW action, in 2016, the Court of Appeal issued new decisions reversing the trial court judgments to the sole extent that Los Angeles County’s EIR did not support its GHG significance impact finding. The matters were remitted to the trial court and that court issued the judgment and writ requested by Los Angeles County. In May 2017, petitioners filed a notice of appeal challenging the scope of the trial court’s judgment and writ.
In July 2017, the BOS certified the final additional environmental analyses and reapproved the Landmark Village and Mission Village projects and related permits. In September 2017, Los Angeles County advised the trial court it had taken the actions required to fully comply with CEQA, the Fish and Game Code, and the writ, and requested that the Superior Court discharge the writs. As explained in further detail below, the two Non-Settling Petitioners filed a new action challenging Los Angeles County’s reapproval of the additional environmental analyses and the Landmark Village and Mission Village projects and related permits.
As with the CDFW action above, in September 2017, the Settling Petitioners settled all of their respective claims in the Landmark Village and Mission Village cases with the Company, leaving only the two Non-Settling Petitioners.
In October 2017, the two Non-Settling Petitioners objected to Los Angeles County’s return to the writs, raising the same issues as to the scope of the trial court’s writ as they raised in the related CDFW action. As requested by the County and the Company, the trial court deferred its ruling on the Non-Settling Petitioners’ objections until the Court of Appeal’s opinion in the related CDFW action had been finalized and that court issued an opinion resolving the Landmark Village and Mission Village appeals as to the scope of the writs. As discussed above, in March 2018, the Supreme Court denied the Non-Settling Petitioners’ petition to review the Court of Appeal’s decision in the CDFW action. Thereafter, in May 2018, the Court of Appeal issued its combined decision
in favor of Los Angeles County and the Company on the Landmark Village and Mission Village appeals as to the scope of the writs. Based on the County’s compliance with the writ directives, the trial court issued signed orders discharging the writs in August 2018.
Landmark Village/Mission Village
In August 2017, the two Non-Settling Petitioners filed a new petition for writ of mandate in the Superior Court. The petition challenges 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 CEQA and the California Water Code. Until a trial court decision has been rendered, the Company cannot predict the outcome of this matter.
Other Permits
In August 2011, the U.S. Army Corps of Engineers (the “Corps”) approved the EIS portion of the joint EIR/EIS and issued its provisional Section 404 Clean Water Act authorization (the “Section 404 Permit”) for the Newhall Ranch project. In September 2012, the Los Angeles Regional Water Quality Control Board (the “Regional Board”) unanimously adopted final Section 401 conditions and certified the Section 404 Permit. In October 2012, petitioners Center for Biological Diversity and Wishtoyo Foundation/Ventura Coastkeeper filed a petition for review and reconsideration of the Regional Board’s actions to the State Water Resources Control Board (“State Board”); however, that petition was withdrawn in September 2017 as part of the settlement referenced above in this action and the CDFW, Landmark Village, and Mission Village actions. In October 2012, after consulting with the U.S. Environmental Protection Agency (the “USEPA”), the Corps issued the final Section 404 Permit.
In July 2014, plaintiffs, the Settling Petitioners and the Non-Settling Petitioners, filed a complaint against the Corps and the USEPA in the U.S. District Court, Central District of California (Los Angeles) (“U.S. District Court”). The complaint alleged that those two federal agencies violated various environmental and historic preservation laws in connection with the Section 404 Permit and requested, among other things, that the U.S. District Court vacate the federal agencies’ approvals and prohibit construction activities pending compliance with federal law. The Company was granted intervenor status by the U.S. District Court in light of its interests as the landowner and holder of the Section 404 Permit. In June 2015, the U.S. District Court issued a favorable order granting the Corps’ and the Company’s motions for summary judgment and denying plaintiffs’ summary judgment motion. In September 2015, plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”). The Ninth Circuit briefing is completed and oral argument occurred in February 2017.
Consistent with the terms of the settlement in this action and the CDFW, Landmark Village, and Mission Village actions, the Settling Petitioners moved to dismiss their claims on appeal and withdraw from the U.S. District Court litigation. In October 2017, the Ninth Circuit granted the motion to dismiss the appeal and the claims with prejudice as to the Settling Petitioners. The Ninth Circuit then ordered supplemental briefs to explain the impact of the dismissal, if any, on the remaining claims. The Corps and the Company, on the one hand, and the two Non-Settling Petitioners, on the other hand, filed supplemental briefs pursuant to the Court’s order. In April 2018, the Ninth Circuit issued its opinion affirming the U.S. District Court’s summary judgment in favor of the Corps and the Company as intervenor. The Ninth Circuit opinion became final and non-appealable in July 2018.
Hunters Point Litigation
On May 1, 2018, residents of the Bayview Hunters Point neighborhood filed a putative class action in San Francisco Superior Court naming Tetra Tech, Inc. (“Tetra Tech”), Lennar and the Company as defendants. The plaintiffs allege that, among other things, Tetra Tech, an independent contractor hired by the U.S. Navy to conduct testing and remediation of toxic radiological waste at The San Francisco Shipyard, 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. On June 15, 2018, two construction workers who allegedly engaged in development activities at The San Francisco Shipyard filed a lawsuit in San Francisco Superior Court naming Tetra Tech, Lennar and the Company, among others, as defendants. The plaintiffs allege personal injuries resulting from exposure to contamination at The San Francisco Shipyard and are seeking damages relating to such alleged injuries. On July 24, 2018, two lawsuits were filed in San Francisco Superior Court by 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 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. The Company believes that it has meritorious defenses to the allegations in these cases and may have insurance and indemnification rights against third 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 consolidated financial statements.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the
six months ended
June 30, 2018
and
2017
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
Cash paid for interest, all of which was capitalized to inventories
|
$
|
22,099
|
|
|
$
|
2,105
|
|
|
|
|
|
NONCASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
Receivable for insurance proceeds on damaged property
|
$
|
132
|
|
|
$
|
—
|
|
Accrued deferred equity offering and financing costs
|
$
|
—
|
|
|
$
|
769
|
|
Recognition of TRA liability
|
$
|
17,480
|
|
|
$
|
56,216
|
|
Reimbursement obligation to the Great Park Venture related to property investment
|
$
|
—
|
|
|
$
|
11,250
|
|
Liabilities assumed by buyer in connection with sale of golf course operating property
|
$
|
7,795
|
|
|
$
|
—
|
|
Class A common shares issued for redemption of noncontrolling interests
|
$
|
26,675
|
|
|
$
|
—
|
|
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
six months ended
June 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Cash and cash equivalents
|
$
|
678,637
|
|
|
$
|
514,411
|
|
Restricted cash and certificates of deposit
|
1,403
|
|
|
2,298
|
|
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows
|
$
|
680,040
|
|
|
$
|
516,709
|
|
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
As of and for the three and
six months ended
June 30, 2018
, the Company’s reportable segments consist of:
• Newhall—includes the community of Newhall Ranch planned for development in northern Los Angeles County, California. The Newhall 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.
• San Francisco—includes the Candlestick Point 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 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
June 30, 2018
, 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 in the Formation Transactions. 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
June 30, 2018
, 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)
|
|
Revenues
|
|
Profit (Loss)
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Newhall
|
$
|
1,242
|
|
|
$
|
7,535
|
|
|
$
|
(4,264
|
)
|
|
$
|
(6,094
|
)
|
|
$
|
4,040
|
|
|
$
|
10,539
|
|
|
$
|
(1,201
|
)
|
|
$
|
(13,135
|
)
|
San Francisco
|
1,840
|
|
|
1,719
|
|
|
(4,916
|
)
|
|
(5,385
|
)
|
|
3,862
|
|
|
86,944
|
|
|
(9,679
|
)
|
|
(7,027
|
)
|
Great Park
|
180,524
|
|
|
6,499
|
|
|
40,831
|
|
|
(4,543
|
)
|
|
190,988
|
|
|
15,246
|
|
|
29,465
|
|
|
(8,092
|
)
|
Commercial
|
6,331
|
|
|
—
|
|
|
193
|
|
|
—
|
|
|
13,126
|
|
|
—
|
|
|
879
|
|
|
—
|
|
Total reportable segments
|
189,937
|
|
|
15,753
|
|
|
31,844
|
|
|
(16,022
|
)
|
|
212,016
|
|
|
112,729
|
|
|
19,464
|
|
|
(28,254
|
)
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Removal of results of unconsolidated entities—
|
Great Park Venture (1)
|
(170,606
|
)
|
|
(2,507
|
)
|
|
(37,464
|
)
|
|
6,048
|
|
|
(171,013
|
)
|
|
(7,180
|
)
|
|
(22,731
|
)
|
|
11,136
|
|
Gateway Commercial Venture (1)
|
(6,241
|
)
|
|
—
|
|
|
(103
|
)
|
|
—
|
|
|
(12,946
|
)
|
|
—
|
|
|
(699
|
)
|
|
—
|
|
Add equity in earnings (losses) from unconsolidated entities—
|
Great Park Venture
|
—
|
|
|
—
|
|
|
8,926
|
|
|
(2,365
|
)
|
|
—
|
|
|
—
|
|
|
4,872
|
|
|
(5,241
|
)
|
Gateway Commercial Venture
|
—
|
|
|
—
|
|
|
77
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
524
|
|
|
—
|
|
Corporate and unallocated (3)
|
—
|
|
|
—
|
|
|
(14,583
|
)
|
|
(11,950
|
)
|
|
—
|
|
|
—
|
|
|
(27,030
|
)
|
|
(25,054
|
)
|
Total consolidated balances
|
$
|
13,090
|
|
|
$
|
13,246
|
|
|
$
|
(11,303
|
)
|
|
$
|
(24,289
|
)
|
|
$
|
28,057
|
|
|
$
|
105,549
|
|
|
$
|
(25,600
|
)
|
|
$
|
(47,413
|
)
|
Segment assets and reconciliations to the Company’s consolidated balances are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Newhall
|
$
|
486,005
|
|
|
$
|
444,407
|
|
San Francisco
|
1,114,349
|
|
|
1,123,266
|
|
Great Park
|
1,323,695
|
|
|
1,578,142
|
|
Commercial
|
457,313
|
|
|
456,292
|
|
Total reportable segments
|
3,381,362
|
|
|
3,602,107
|
|
Reconciling items:
|
|
|
|
Removal of unconsolidated balance of Great Park Venture (1)
|
(1,178,594
|
)
|
|
(1,447,604
|
)
|
Removal of unconsolidated balances of Gateway Commercial Venture (1)
|
(457,067
|
)
|
|
(456,006
|
)
|
Other eliminations (2)
|
—
|
|
|
(80,890
|
)
|
Add investment balance in Great Park Venture
|
431,430
|
|
|
423,492
|
|
Add investment balance in Gateway Commercial Venture
|
107,040
|
|
|
106,516
|
|
Corporate and unallocated (3)
|
674,111
|
|
|
830,740
|
|
Total consolidated balances
|
$
|
2,958,282
|
|
|
$
|
2,978,355
|
|
(1) Represents the removal of the Great Park Venture’s and Gateway Commercial Venture’s operating results and balances that are included in the Great Park segment and Commercial segment operating results and balances, respectively, but are not included in the Company’s consolidated results and balances.
(2) Represents intersegment balances that eliminate in consolidation.
(3) Corporate and unallocated activity is primarily comprised of corporate general, and administrative expenses. Corporate and unallocated assets consist of cash and cash equivalents, receivables, and prepaid expenses.
15.
SHARE-BASED COMPENSATION
On May 2, 2016, the Board of the Holding Company authorized and approved the Company’s Incentive Award Plan. In doing so, the Board authorized the issuance of up to
8,500,822
Class A common shares of the Holding Company under the Incentive Award Plan. The Incentive Award Plan provides for the grant of share options, restricted shares, restricted share units, performance awards (which include, but are not limited to, cash bonuses), distribution equivalent awards, deferred share awards, share payment awards, share appreciation rights, other incentive awards (which include, but are not limited to, LTIP Unit awards (as defined in the Incentive Award Plan) and performance share awards. As of
June 30, 2018
, there were
4,043,778
remaining Class A common shares available for future issuance under the Incentive Award Plan.
Restricted Share Units
As part of the authorization and approval of the Incentive Award Plan on May 2, 2016, the Board of the Holding Company also authorized and approved the issuance, grant, and delivery of up to
2,350,406
Restricted Share Units (“RSUs”), all of which were granted in 2016. A portion of the RSUs were granted to management and had no requisite service period and were fully vested at the grant date. The remaining portion of the RSUs were granted to management and non-employee consultants and are subject to
three
or
four
year vesting terms. All of the RSUs settle on a
one
-for-one basis in Class A common shares in
four
equal annual installments with the first settlement having occurred on January 15, 2017. The RSUs may not be sold or transferred prior to settlement. In general, RSUs which have not vested are forfeited upon termination of employment or consulting arrangements. In January 2018, in connection with the second settlement of RSUs, the Company reacquired
281,438
vested RSUs for
$4.1 million
for the purpose of settling tax withholding obligations of employees.
Restricted Shares
Restricted shares issued under the Incentive Award Plan are subject to certain transfer restrictions during the vesting period. In general, restricted Class A common shares which have not vested are forfeited upon termination of employment or board service. Grantees of restricted Class A common shares have the right to receive non-forfeitable distributions and to vote with respect to the restricted Class A common shares during the restricted period.
In January 2017, the Company granted
396,028
restricted Class A common shares to executive officers of the Company. The restricted Class A common shares vest for service in three equal annual installments, the first of which occurred in January 2018. In connection with the first vesting date in January 2018, the Company reacquired
68,886
restricted Class A common shares for
$1.0 million
for the purpose of settling tax withholding obligations of employees.
During the
six months ended
June 30, 2018
, the Company granted employees and directors
1,724,268
restricted Class A common shares with service vesting terms ranging from one to three years. The fair value of the compensation cost associated with these awards was determined based on the closing market price of the Company’s Class A common shares on each award’s grant date.
The following table summarizes share-based equity compensation activity for the
six months ended
June 30, 2018
:
|
|
|
|
|
|
|
|
|
Share-Based Awards
(in thousands)
|
|
Weighted-
Average Grant
Date Fair Value
|
Nonvested at January 1, 2018
|
1,085
|
|
|
$
|
18.57
|
|
Granted
|
1,724
|
|
|
$
|
14.81
|
|
Forfeited
|
(71
|
)
|
|
$
|
14.83
|
|
Vested
|
(780
|
)
|
|
$
|
18.93
|
|
Nonvested at June 30, 2018
|
1,958
|
|
|
$
|
15.26
|
|
Share-based compensation expense was
$2.7 million
and
$6.1 million
for the three and
six months ended
June 30, 2018
, respectively and
$4.0 million
and
$8.8 million
for the three and
six months ended
June 30, 2017
, respectively. Share-based compensation expense is included in selling, general, and administrative expenses in the accompanying condensed consolidated statements of operations. Approximately
$24.4 million
of total unrecognized compensation cost related to non-vested awards is expected to be recognized over a weighted–average period of
2.4
years from
June 30, 2018
. The estimated fair value at vesting of share-based awards that vested during the
six months ended
June 30, 2018
and
June 30, 2017
was
$11.5 million
and
$9.7 million
, respectively.
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. For the
six months ended
June 30, 2018
, the Company contributed
$0.2 million
to the Retirement Plan. The Company does
no
t anticipate making additional contributions during the year ending
December 31, 2018
.
The components of net periodic benefit for the three and
six months ended
June 30, 2018
and
2017
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net periodic benefit:
|
|
|
|
|
|
|
|
Interest cost
|
$
|
188
|
|
|
$
|
206
|
|
|
$
|
375
|
|
|
$
|
412
|
|
Expected return on plan assets
|
(290
|
)
|
|
(257
|
)
|
|
(580
|
)
|
|
(514
|
)
|
Amortization of net actuarial loss
|
21
|
|
|
28
|
|
|
43
|
|
|
56
|
|
Net periodic benefit
|
$
|
(81
|
)
|
|
$
|
(23
|
)
|
|
$
|
(162
|
)
|
|
$
|
(46
|
)
|
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 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 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 each of the three months ended
June 30, 2018
and
2017
, the Company recorded
no
benefit for income taxes (after application of increases in the Company’s valuation allowance of
$1.2 million
and
$4.3 million
, respectively) on pre-tax loss of
$11.3 million
and
$24.3 million
, respectively. For each of the
six months ended
June 30, 2018
and
2017
, the Company recorded
no
benefit for income taxes (after application of increases in the Company’s valuation allowance of
$2.8 million
and
$7.5 million
, respectively) on pre-tax loss of
$25.6 million
and
$47.4 million
, respectively. The effective tax rates for the three and
six months ended
June 30, 2018
and
2017
, differ
from the 21% federal statutory rate in 2018 and the 35% federal statutory rate prior to 2018 and applicable state statutory tax 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.
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 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 Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. Among its provisions, the Tax Act reduced the US federal corporate income tax rate from 35% to 21%. As of December 31, 2017, we have completed the majority of our accounting for the tax effects of the Tax Act. As a result of the rate change, the Company was required to revalue its deferred tax asset at December 31, 2017 and record a provisional adjustment to reduce its value by
$5.3 million
, which is included in the tax provision for 2017. We are applying the guidance issued by the Securities and Exchange Commission in the form of Staff Accounting Bulletin 118 when accounting for the enactment-date effects of the Tax Act. The provisional amount recorded during 2017 is subject to revisions as we complete our analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service, FASB, and other standard-setting and regulatory bodies.
Through the
six months ended
June 30, 2018, we recognized no adjustments to the provisional amounts recorded at December 31, 2017. We will continue to make and refine our calculations as additional analysis is completed, and our accounting for the tax effects of the Tax Act will be completed during the one-year measurement period.
The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. Fiscal years 2013 through 2017 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 jurisdictions 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.
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
June 30, 2018
and
December 31, 2017
. The fair value of the Company’s notes payable, net, are estimated based on quoted market prices or discounting the expected cash flows based on rates available to the Company (level 2). At
June 30, 2018
, the estimated fair value of notes payable, net was
$575.1 million
compared to a carrying value of
$556.4 million
. At
December 31, 2017
, the estimated fair value of notes payable, net was
$568.1 million
compared to a carrying value of
$560.6 million
. During the
three and six
months ended
June 30, 2018
and
2017
, the Company had no assets that were measured at fair value on a nonrecurring basis.
Contingent consideration is carried at fair value and is remeasured on a recurring basis. The Company uses level 3 inputs to measure the estimated fair value of the contingent consideration arrangement based on the expected cash flows considering the use of the underlying property subject to the arrangement. The estimated cash flows are affected by estimates and assumptions related to development costs, retail rents, occupancy rates and continuing operating expenses. Other than contingent consideration (see Note 9), the Company had no other assets or liabilities that are required to be remeasured at fair value on a recurring basis at both
June 30, 2018
and
December 31, 2017
.
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. No distributions were declared for the three and
six months ended
June 30, 2018
and 2017 and the Company operated in a net loss position for the three and
six months ended
June 30, 2018
and 2017. As a result, net losses attributable to the parent were 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 per Class A common share is determined by dividing net loss allocated to Class A Common shareholders by the weighted average number of Class A common shares outstanding for the period. Basic loss per Class B common share is determined by dividing net loss allocated to the Class B common shares by the weighted average number of Class B common shares outstanding during the period.
Diluted loss 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, and the treasury stock method for RSUs and restricted shares, and are included in the calculation if determined to be dilutive.
The following table summarizes the basic and diluted earnings per share calculations for the three and
six months ended
June 30, 2018
and
2017
(in thousands, except shares and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
|
|
|
|
Net loss attributable to the Company
|
$
|
(5,160
|
)
|
|
$
|
(9,783
|
)
|
|
$
|
(10,392
|
)
|
|
$
|
(17,625
|
)
|
Adjustments to net loss attributable to the Company
|
81
|
|
|
173
|
|
|
110
|
|
|
24
|
|
Net loss attributable to common shareholders
|
$
|
(5,079
|
)
|
|
$
|
(9,610
|
)
|
|
$
|
(10,282
|
)
|
|
$
|
(17,601
|
)
|
Numerator—basic common shares:
|
|
|
|
|
|
|
|
Numerator for basic net loss available to Class A common shareholders
|
$
|
(5,077
|
)
|
|
$
|
(9,606
|
)
|
|
$
|
(10,278
|
)
|
|
$
|
(17,592
|
)
|
Numerator for basic net loss available to Class B common shareholders
|
$
|
(2
|
)
|
|
$
|
(4
|
)
|
|
$
|
(4
|
)
|
|
$
|
(9
|
)
|
Numerator—diluted common shares:
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
$
|
(5,079
|
)
|
|
$
|
(9,610
|
)
|
|
$
|
(10,282
|
)
|
|
$
|
(17,601
|
)
|
Reallocation of loss to Company upon assumed exchange of units
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(15,318
|
)
|
|
$
|
—
|
|
Numerator for diluted net loss available to Class A common shareholders
|
$
|
(5,077
|
)
|
|
$
|
(9,606
|
)
|
|
$
|
(25,590
|
)
|
|
$
|
(17,592
|
)
|
Numerator for diluted net loss available to Class B common shareholders
|
$
|
(2
|
)
|
|
$
|
(4
|
)
|
|
$
|
(10
|
)
|
|
$
|
(9
|
)
|
Denominator:
|
|
|
|
|
|
|
|
Basic weighted average Class A common shares outstanding
|
65,076,395
|
|
|
50,993,481
|
|
|
64,226,628
|
|
|
44,931,512
|
|
Diluted weighted average Class A common shares outstanding
|
65,076,395
|
|
|
50,993,481
|
|
|
144,853,566
|
|
|
44,931,512
|
|
Basic and diluted weighted average Class B common shares outstanding
|
79,794,047
|
|
|
77,931,250
|
|
|
80,602,759
|
|
|
76,145,972
|
|
Basic loss per share:
|
|
|
|
|
|
|
|
Class A common shares
|
$
|
(0.08
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.39
|
)
|
Class B common shares
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
Diluted loss per share:
|
|
|
|
|
|
|
|
Class A common shares
|
$
|
(0.08
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.39
|
)
|
Class B common shares
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
Anti-dilutive potential RSUs
|
72,579
|
|
|
688,692
|
|
|
72,579
|
|
|
688,692
|
|
Anti-dilutive potential Restricted Shares (weighted average)
|
1,902,299
|
|
|
396,028
|
|
|
1,789,172
|
|
|
365,226
|
|
Anti-dilutive potential Class A common shares (weighted average)
|
79,817,985
|
|
|
77,954,629
|
|
|
—
|
|
|
76,168,816
|
|
Anti-dilutive potential Class B common shares (weighted average)
|
2,917,827
|
|
|
2,917,827
|
|
|
2,917,827
|
|
|
2,917,827
|
|
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
$2.6 million
at
June 30, 2018
and
$2.5 million
at
December 31, 2017
, net of tax benefits of
$0.7 million
for both periods. At both
June 30, 2018
and
December 31, 2017
, the Company held a full valuation allowance of
$0.7 million
related to the accumulated tax benefits. Accumulated other comprehensive loss of
$1.6 million
and
$1.8 million
is included in noncontrolling interests at
June 30, 2018
and
December 31, 2017
, 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
$26,000
and
$31,000
, net of taxes, for the
six months ended
June 30, 2018
, and
2017
, respectively and are included in other miscellaneous income in the accompanying condensed consolidated statements of operations.