NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Five Point Holdings, LLC, a Delaware limited liability company (the “Holding Company” and, together with its consolidated subsidiaries, the “Company”), is an owner and developer of mixed-use, master-planned communities in California. The Holding Company owns all of its assets and conducts all of its operations through Five Point Operating Company, LP, a Delaware limited partnership (the “Operating Company”), and its subsidiaries.
The Company has two classes of shares outstanding: Class A common shares and Class B common shares. Holders of Class A common shares and holders of Class B common shares are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders, and are both entitled to receive distributions at the same time. However, the distributions paid to holders of our Class B common shares are in an amount per share equal to 0.0003 multiplied by the amount paid per Class A common share.
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 for 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. 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.
Reverse Share Split
On March 30, 2017, the board of directors of the Holding Company (the “Board”) approved, and on March 31, 2017 the Company effected, (i) a 1 for 6.33 reverse share split of issued and outstanding Class A and Class B common shares of the Holding Company, (ii) a 1 for 6.33 reverse unit split of issued and outstanding Class A and Class B Common Units of the Operating Company, and (iii) a 1 for 6.33 reverse unit split of the issued and outstanding Class A and Class B Units of the Operating Company’s consolidated subsidiary, The Shipyard Communities, LLC (the “San Francisco Venture”) (the “Reverse Split”). All share, unit, per share, and per unit amounts in the accompanying consolidated financial statements give effect to the Reverse Split for all periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation— The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Principles of consolidation—The accompanying consolidated financial statements include the accounts of the Company and the accounts of all subsidiaries in which the Company has a controlling interest and the accounts of variable interest entities (“VIEs”) in which the Company is deemed to be the primary beneficiary. A VIE is an entity in which either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. The Company identifies the primary beneficiary of a VIE as the enterprise that has both of the following
characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or receive benefits of the VIE that could potentially be significant to the entity. The Company consolidates its investment in a VIE when it determines that it is its primary beneficiary. The Company may change its original assessment of a VIE upon subsequent events such as the modification of contractual arrangements, or changes in influence and control over any entity, that affect the characteristics of the entity’s equity investments at risk and the disposition of all or a portion of an interest held by the primary beneficiary. The Company performs this analysis on an ongoing basis. All intercompany transactions and balances have been eliminated in consolidation.
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.
Concentration of risk—As of December 31, 2019, the Company’s inventories and the Company’s unconsolidated entities’ inventories and properties are all located in California. The Company is subject to risks incidental to the ownership, development, and operation of commercial and residential real estate. These include, among others, the risks normally associated with changes in the general economic climate in the communities in which the Company operates, trends in the real estate industry, availability of land for development, changes in tax laws, interest rate levels, availability of financing, and potential liability under environmental and other laws.
The Company’s credit risk relates primarily to cash deposits, cash equivalents, contract assets and other miscellaneous financial assets. Cash deposit accounts at each institution are in excess of amounts insured by the Federal Deposit Insurance Corporation. The Company’s risk management policies define parameters of acceptable market risk and strive to limit exposure to credit risk.
Noncontrolling interests—The Company presents noncontrolling interests and classifies such interests within capital, but separate from the Company’s Class A and Class B members’ capital when the criteria for permanent equity classification has been met. Noncontrolling interests in the Company represent interests held by owners, excluding the Operating Company, of consolidated subsidiaries of the Operating Company, and investors in the Operating Company excluding the Holding Company. Net income or loss of the Operating Company is allocated to noncontrolling interests based on substantive profit sharing arrangements within the operating agreements, or if it is determined that a substantive profit sharing arrangement does not exist, allocation is based on relative ownership percentage of the Operating Company and the noncontrolling interests.
Revenue recognition—Under ASC 606, Revenue From Contracts With Customers (“ASC 606”), which the Company adopted on January 1, 2018, revenues are recognized when control of the promised goods or services are 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.
Land sales—Revenues from land sales are recognized when the Company satisfies the performance obligation at a point in time when the control of the land passes to its customers. The transfer of control typically occurs when title passes at the close of escrow and the customer is able to direct the use of, control and obtain substantially all of the benefits from the land. The transaction price typically contains fixed and variable components in which the fixed consideration represents the stated purchase price for the land and the gross proceeds received at the time of closing. Some of the Company’s residential homesite sale agreements contain a profit participation provision, a variable form of consideration, whereby the Company receives from homebuilders a portion of profit after the builder has received an agreed-upon margin. If the project profitability falls short of the participation threshold, no additional revenue is received. In most contracts, at the time of the land sale, the estimate of profit participation, if any, is constrained, as there are significant factors outside of the Company’s control that will impact whether participation thresholds will be met. In addition, some residential homesite sale agreements contain a provision requiring the homebuilder to pay a marketing fee per residence sold, as a percentage of the home sale
price. Such fees are estimated as a variable form of consideration and the amount the Company expects to be entitled to receive from the homebuilder is recognized as revenue at the time of land sale. Since payment for variable consideration is received in future periods, but the Company has completed its performance obligation, a contract asset is recorded for contingent variable consideration included in the transaction price. At the end of each reporting period, variable considerations are reassessed to ensure changes in circumstances or constraints are appropriately reflected in the estimated transaction price. Changes in estimates of variable components of transaction prices could result in cumulative catch-up adjustments to revenue in subsequent periods. In some cases, the Company may be obligated to perform post-closing development obligations on the sold land and as a result may defer a portion of the transaction price.
Results for reporting periods prior to January 1, 2018 are reported in accordance with historic accounting under ASC Topic 605, Revenue Recognition (“ASC 605”) and other industry specific guidance. Under ASC 605, revenues from land sales were recognized when a significant down payment was received, the earnings process was complete, title passes, and the collectability of any receivables was reasonably assured. Revenues from profit participation were recognized when sufficient evidence existed that the homebuilding project had met the participation thresholds and the Company had collected the profit participation payment or was reasonably assured of collection. The Company deferred revenue on amounts collected in advance of meeting the recognition criteria. Lastly, marketing fees were recognized upon collection of receipts from the customer.
Management Services—Under ASC 606, revenues from management services are recognized as the customer consumes the benefits of the performance obligation satisfied over time. The transaction price pertaining to management services revenue may be comprised of fixed and variable components. 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. The Company’s management agreements may also contain incentive compensation fee provisions contingent on the performance of customers. In making estimates of incentive compensation, the Company expects to be entitled to receive in exchange for providing management services, significant assumptions and judgments are made in evaluating the factors that may determine the amount of consideration the Company will ultimately receive. In doing so, cash flow projections are typically utilized. 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. 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. Incentive compensation revenue from management services is recognized evenly over the expected contract term, as the performance obligation is satisfied. When changes in estimates and assumptions occur, the estimate of the amount of incentive compensation the Company expects to be entitled to receive and constraints on the estimate may change, resulting in a cumulative catch-up being recorded in the period of the change. A contract asset is recognized when there is a timing difference between the satisfaction of performance obligations and revenues becoming billable. Reassessment of the estimated transaction price at the end of each reporting period may increase or decrease contract assets.
Under ASC 605, the Company recorded management services revenues over the period in which the services were performed, fees were determinable, and collectability was reasonably assured. The Company recorded revenues from annual fees ratably over the contract period using the straight-line method and the Company recognized incentive compensation in the period in which the contingency was resolved and only to the extent other recognition conditions had been met.
Operating properties—Included in operating properties revenues in the consolidated statements of operations are revenues from the Company’s agriculture and energy operations and its golf club operation, The Tournament Players Club at Valencia Golf Course (sold in January 2018). Agriculture crop and energy revenues are recognized in accordance with ASC 606 at a point in time when control is transferred to the customer. Under ASC 605, the Company recorded agriculture crop and energy revenues when the Company collected payment or was reasonably assured of collection. Agriculture leasing revenue is recognized in accordance with applicable lease accounting guidance.
Impairment of assets—Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. Impairment indicators for long-lived inventory assets include, but are not limited to, significant increases in horizontal development costs, significant decreases in the pace and pricing of home sales within the Company’s communities and surrounding areas and political and societal events that may negatively affect the local economy. For operating properties, impairment indicators may include significant increases in operating costs, decreased utilization, and continued net operating losses. If indicators of impairment exist, and the undiscounted cash flows expected to be generated by a long-lived asset are less than its carrying amount, an impairment charge is recorded to write down the carrying amount of such long-lived asset to its estimated fair value. The Company generally estimates the fair value of its long-lived assets using a discounted cash flow model or sales comparison approach of the underlying property or a combination thereof.
The Company’s projected cash flows for each long-lived inventory asset 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 costs, and other factors. For operating properties, the Company’s projected cash flows also include estimates and assumptions about the use and eventual disposition of such properties, including utilization, capital expenditures, operating expenses, and the amount of proceeds to be realized upon eventual disposition of such properties.
In determining these estimates and assumptions, the Company utilizes historical trends from past development projects of the Company in addition to internal and external market studies and trends, which generally include, but are not limited to, statistics on population demographics and unemployment rates.
Using all available information, the Company calculates its estimate of projected cash flows for each asset. While many of the estimates are calculated based on historical and projected trends, all estimates are subjective and change as market and economic conditions change. The determination of fair value also requires discounting the estimated cash flows at a rate the Company believes a market participant would determine to be commensurate with the inherent risks associated with the asset and related estimated cash flow streams. The discount rate used in determining each asset’s fair value generally depends on the asset’s projected life and development stage.
Share-based payments— Share-based payments are recognized on a straight-line basis over the service period in the statement of operations based on their measurement date fair values. Forfeitures, if any, are accounted for in the period when they occur.
Cash and cash equivalents—Included in cash and cash equivalents are short-term investments that have original maturity dates of three months or less. The carrying amount approximates fair value due to the short-term nature of these investments.
Restricted cash and certificates of deposit—Restricted cash and certificates of deposit consist of cash, cash equivalents, and certificates of deposit held as collateral on open letters of credit related to development obligations or because of other legal obligations of the Company that require the restriction.
Marketable securities—During the year ended December 31, 2017, the Company made investments in marketable debt securities. The Company purchased each investment with the intent and ability to hold the investment until maturity and carried each investment at amortized cost. The amortized cost of such debt securities were adjusted for amortization of premiums and accretion of discounts, using the effective interest method or a method that approximates the effective interest method. Amortization and accretion of premiums and discounts are included in selling, general, and administrative costs and expenses in the accompanying consolidated statements of operations. The Company evaluates securities in unrealized loss positions for evidence of other-than-temporary impairment, considering, among other things, duration and severity of any declines in value, and financial condition of the issuer. No other-than-temporary impairments were identified during the year ended December 31, 2017, and the Company held no marketable securities during the years ended December 31, 2019 or 2018.
Properties and equipment—Properties and equipment primarily relate to the Company’s agriculture operating properties’ businesses and are recorded at cost. Properties and equipment, other than land, are depreciated over their estimated useful lives using the straight-line method. At the time properties and equipment are disposed of, the asset and related accumulated depreciation, if any, are removed from the accounts, and any resulting gain or
loss is credited or charged to earnings. The estimated useful life for land improvements and buildings is 10 to 40 years while the estimated useful life for furniture, fixtures, and equipment is two to 15 years.
Investments in unconsolidated entities—For investments in entities that the Company does not control, but exercises significant influence, the Company uses the equity method of accounting. The Company’s judgment with regard to its level of influence or control of an entity involves consideration of various factors including the form of its ownership interest, its representation in the entity’s governance, its ability to participate in policy-making decisions, and the rights of other investors to participate in the decision-making process to replace the Company as manager or to liquidate the entity. Investments accounted for under the equity method of accounting are recorded at cost and adjusted for the Company’s share in the earnings (losses) of the venture and cash contributions and distributions. Any difference between the carrying amount of the equity method investment on the Company’s balance sheet and the underlying equity in net assets on the entity’s balance sheet results in a basis difference which is adjusted as the related underlying assets are depreciated, amortized, or sold and the liabilities are settled. The Company generally allocates income and loss from unconsolidated entities based on the venture’s distribution priorities, which may be different from its stated ownership percentage.
The Company evaluates the recoverability of its investment in unconsolidated entities by first reviewing each investment for any indicators of impairment. If indicators are present, the Company estimates the fair value of the investment. If the carrying value of the investment is greater than the estimated fair value, management makes an assessment of whether the impairment is “temporary” or “other-than-temporary.” In making this assessment, management considers the following: (1) the length of time and the extent to which fair value has been less than cost, (2) the financial condition and near-term prospects of the entity, and (3) the Company’s intent and ability to retain its interest long enough for a recovery in market value. If management concludes that the impairment is “other-than-temporary,” the Company reduces the investment to its estimated fair value. No other-than-temporary impairments were identified during either the year ended December 31, 2019, 2018 or 2017.
Inventories—Inventories primarily include land held for development and sale. Inventories are stated at cost, less reimbursements, unless the inventory within a community is determined to be impaired, in which case the impaired inventory would be written down to fair market value. Capitalized direct and indirect inventory costs include land, land in which the Company has the rights to receive in accordance with a disposition and development agreement, horizontal development costs, real estate taxes, and interest related to financing development and construction. During the years ended December 31, 2019, 2018 and 2017, the Company incurred interest expense, including amortization of debt issuance costs, all of which was capitalized into inventories, of $49.7 million, $54.8 million and $9.4 million, respectively. Horizontal development costs can be further broken down to costs incurred to entitle and permit the land for its intended use; costs incurred for infrastructure projects, such as schools, utilities, roads, and bridges; and site costs, such as grading and amenities, to bring the land to a saleable state. General and administrative costs related to project litigation are charged to expense when incurred. Costs that cannot be clearly associated with the acquisition, development, and construction of a real estate project and selling expenses are expensed as incurred. The Company expenses advertising costs as incurred, which were $1.7 million, $2.0 million and $4.3 million during the years ended December 31, 2019, 2018 and 2017, respectively. Certain public infrastructure project costs incurred by the Company are eligible for reimbursement, typically, from the proceeds of Community Facilities District (“CFD”) bond debt, state and federal grants or property tax assessments.
Capitalized inventory costs that are allocated to individual parcels within a project are allocated to the parcels benefited using relative sales value. Under the relative sales value method, each parcel sold in the project under development is allocated costs incurred and estimates of future inventory costs in proportion to the sales price of the sold parcel relative to the estimated overall sales prices of the project. Since this method requires the Company to estimate the expected sales prices for the entire project, the profit margin on subsequent parcels sold will be affected by both changes in the estimated total revenues, as well as any changes in the estimated total cost of the project.
Intangible Asset—The Company’s intangible asset relates to the contract value of the incentive compensation provisions of the Company’s (see Note 4 and Note 8) development management agreement with Heritage Fields LLC, (the “Great Park Venture”). The Company records amortization expense over the contract period based on the pattern in which the Company expects to recognize the economic benefits from the incentive compensation.
Receivables—The Company evaluates the carrying value of receivables, which includes receivables from related parties, at each reporting date to determine the need for an allowance for doubtful accounts. As of both December 31, 2019 and 2018, the allowance for doubtful accounts was not significant.
Leases—Under ASC Topic 842, Leases, the Company determines at contract inception if an arrangement contains a lease. If the contract contains a lease, the Company determines the classification of such lease. The Company has elected the practical expedient to not separate lease and nonlease components for both lessee and lessor arrangements. For operating leases with an expected term greater than one year in which the Company is the lessee, operating right of use (“ROU”) assets and operating lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term.
When the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is derived from assessment of the credit quality of the Company and adjusted to reflect secured borrowing, estimated yield curves and long-term spread adjustments over appropriate tenors. The Company only includes renewal options in the lease term when it is reasonably certain that it will exercise such options.
The Company excludes the recognition of short-term leases on the balance sheet and lease payments for short term leases are recognized in the consolidated statements of operations on a straight-line basis over the lease term.
Fair value measurements—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
In instances where the determination of the fair value measurements is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Contingent consideration assumed in a business combination is remeasured at fair value each reporting period until the contingency is resolved and any change in the fair value from either the passage of time or events occurring after the acquisition date, is recorded in results from operations.
Offering Costs—Costs incurred by the Company, totaling $2.9 million, that were directly attributable to the IPO were deferred and charged against the gross proceeds of the offering as a reduction of members’ contributed capital.
Income taxes—The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”), 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.
The Holding Company has elected to be treated as a corporation for U.S. federal, state, and local tax purposes and determines the provision or benefit for income taxes on an interim basis using an estimate of its annual effective tax rate and the impact of specific events as they occur.
The Company’s estimate of the Holding Company’s annual effective tax rate is subject to change based on changes in federal and state tax laws and regulations, the Holding Company’s ownership interest in the Operating Company and the Operating Company’s ownership in the San Francisco Venture, and the Company’s assessment of its deferred tax asset valuation allowance. Cumulative adjustments are made in interim periods in which the Company identifies a change in its estimate of the amount of future tax benefit when it is more likely than not that some portion of the deferred tax assets will not be realized. Among other things, the nature, frequency and severity of prior cumulative losses, forecasts of future taxable income, the duration of statutory carryforward periods, the Company’s utilization experience with operating loss and tax credit carryforwards and tax planning alternatives are considered and evaluated when assessing the need for a valuation allowance. Any increase or decrease in a valuation allowance could have a material adverse effect or beneficial effect on the Holding Company’s income tax provision and net income or loss in the period the determination is made. The Holding Company recognizes interest or penalties related to income tax matters in income tax expense.
Miscellaneous other income—Miscellaneous other income consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Gain on sale of golf club operating property
|
$
|
—
|
|
|
$
|
6,700
|
|
|
$
|
—
|
|
Gain on insurance claims and other
|
13
|
|
|
1,566
|
|
|
—
|
|
Net periodic pension benefit
|
35
|
|
|
307
|
|
|
93
|
|
Total miscellaneous other income
|
$
|
48
|
|
|
$
|
8,573
|
|
|
$
|
93
|
|
Recently issued accounting pronouncements—In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”) which amends the guidance on the impairment of financial instruments, including most debt instruments, trade receivables, contract assets, and loans. ASU No. 2016-13 adds to U.S. GAAP an impairment model known as the current expected credit loss model 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 public business entities (excluding entities eligible to be smaller reporting companies), for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and early adoption is permitted. The Company will adopt ASU No. 2016-13 on January 1, 2020 using a modified retrospective approach. The Company does not expect the adoption of ASU No. 2016-13 to have a material impact on its consolidated financial statements.
Recently adopted accounting pronouncements—In June 2018, the FASB issued 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 is aligned with the requirements for share-based payments granted to employees, including the determination of the measurement date. The Company adopted ASU No. 2018-07 on January 1, 2019 with no material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”). This ASU generally requires that lessees recognize right-of-use ("ROU") assets and lease liabilities on the balance sheet for operating and financing leases and also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. The FASB has issued multiple clarifications and updates since ASU No. 2016-02 that include, but are not limited to, the ability to elect practical expedients upon transition.
The Company adopted ASU No. 2016-02 and the related ASUs that formed ASC Topic 842, Leases, on January 1, 2019 using the modified retrospective approach. Consequently, comparative prior periods presented in financial statements after adoption will continue to be in accordance with historical U.S. GAAP (Topic 840, Leases). Upon transition, the Company elected the package of practical expedients, whereby the Company did not reassess whether existing contracts contain leases, the lease classification of existing leases and initial direct costs associated with those leases.
The impact of adopting the new guidance primarily relates to (i) the recognition of ROU assets and lease liabilities for operating leases, and (ii) the requirement to provide more robust disclosure on the nature of the Company’s leases, cash flow impacts arising from leases and significant assumptions or judgments used by management to determine whether a contract contains a lease as well as a determination of the discount rate for a lease. The adoption of ASU No. 2016-02 did not have a material impact on the Company's consolidated statement of operations and statement of cash flows.
The cumulative effect of the changes made to the Company’s consolidated January 1, 2019 balance sheet from the adoption of the new lease guidance was as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
Adjustments due to ASU No. 2016-02
|
|
Balance at January 1, 2019
|
ASSETS
|
|
|
|
|
|
Related party assets
|
$
|
61,039
|
|
|
$
|
18,811
|
|
|
$
|
79,850
|
|
Other assets
|
9,179
|
|
|
11,425
|
|
|
20,604
|
|
LIABILITIES
|
|
|
|
|
|
Accounts payable and other liabilities
|
161,139
|
|
|
11,425
|
|
|
172,564
|
|
Related party liabilities
|
178,540
|
|
|
18,811
|
|
|
197,351
|
|
3. REVENUES
The Company adopted ASC Topic 606 on January 1, 2018 using the modified retrospective approach with the cumulative effect recorded as an adjustment to opening capital. 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 and other industry specific guidance.
The following tables present the Company’s consolidated revenues disaggregated by revenue source and reporting segment (see Note 15) (in thousands):
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Year ended December 31, 2019
|
|
Valencia
|
|
San Francisco
|
|
Great Park
|
|
Commercial
|
|
Total
|
Land sales
|
$
|
140,058
|
|
|
$
|
885
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
140,943
|
|
Management services
|
—
|
|
|
2,385
|
|
|
36,873
|
|
|
322
|
|
|
39,580
|
|
Operating properties
|
1,642
|
|
|
725
|
|
|
—
|
|
|
—
|
|
|
2,367
|
|
|
141,700
|
|
|
3,995
|
|
|
36,873
|
|
|
322
|
|
|
182,890
|
|
Operating properties leasing revenues
|
1,490
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,490
|
|
|
$
|
143,190
|
|
|
$
|
3,995
|
|
|
$
|
36,873
|
|
|
$
|
322
|
|
|
$
|
184,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
|
Valencia
|
|
San Francisco
|
|
Great Park
|
|
Commercial
|
|
Total
|
Land sales
|
$
|
149
|
|
|
$
|
884
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,033
|
|
Management services
|
—
|
|
|
4,397
|
|
|
35,090
|
|
|
1,489
|
|
|
40,976
|
|
Operating properties
|
3,878
|
|
|
729
|
|
|
—
|
|
|
—
|
|
|
4,607
|
|
|
4,027
|
|
|
6,010
|
|
|
35,090
|
|
|
1,489
|
|
|
46,616
|
|
Operating properties leasing revenues
|
2,374
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,374
|
|
|
$
|
6,401
|
|
|
$
|
6,010
|
|
|
$
|
35,090
|
|
|
$
|
1,489
|
|
|
$
|
48,990
|
|
Contract balances are recorded on the consolidated balance sheet in either related party assets or other assets for receivables from customers and contract assets (unbilled receivables) depending on whether the customer is a related party. Similarly, contract liabilities (deferred revenue) are included in accounts payable and other liabilities and related party liabilities.
The opening and closing balances of the Company’s contract assets for the year ended December 31, 2019 were $50.6 million ($49.8 million related party, see Note 9) and $73.0 million ($68.1 million related party, see Note 9), respectively. The increase of $22.4 million between the opening and closing balances of the Company’s contract assets primarily results from an increase of $18.6 million as a result of a timing difference between the Company’s recognition of revenue earned for the performance of management services and no contractual payments due from the customer during the period.
The opening (after initial adoption) and closing balances of the Company’s contract assets for the year ended December 31, 2018 were $39.0 million ($38.3 million related party) and $50.6 million ($49.8 million related party, see Note 9), respectively. The increase of $11.6 million between the opening and closing balances of the Company’s contract assets primarily results from an increase of $18.6 million as a result of a timing difference between the Company’s recognition of revenue earned for the performance of management services and contractual payments due from the customer during the period. Offsetting such increase was the derecognition of $7.0 million, representing variable cash consideration related to a land sale from a previous period. In September 2018, the Company relinquished its rights to the variable consideration in favor of additional entitlements transferred from the buyer that can be used at the Candlestick and The San Francisco Shipyard communities (see Note 9). The total
transaction price for this purchase and sale agreement did not change as a result of the changes to the consideration components.
The opening and closing balances of the Company’s receivables from contracts with customers and contract liabilities for the years ended December 31, 2019 and 2018 were insignificant.
The Company, through Five Point Communities, LP (“FP LP”), and Five Point Communities Management, Inc., (“FP Inc.” and together with FP LP, the “Management Company”), has a development management agreement, as amended and restated (“A&R DMA”), with the Great Park Venture. The A&R DMA has an original term commencing on December 29, 2010 and ending on December 31, 2021, with options to renew upon mutual agreement for three additional years and then two additional years. Consideration in the form of contingent incentive compensation from the A&R DMA is recognized as revenue and a contract asset as services are provided over the expected contract term, although contractual payments are due in connection with distributions made to the members of the Great Park Venture. As of December 31, 2019, the aggregate amount of the constrained transaction price allocated to the Company’s partially unsatisfied performance obligations associated with the A&R DMA was $37.2 million. The Company will recognize this revenue ratably as services are provided over the remaining expected contract term. 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. INVESTMENT IN UNCONSOLIDATED ENTITIES
Great Park Venture
The Great Park Venture has two classes of interests—“Percentage Interests” and “Legacy Interests.” Legacy Interest holders are entitled to receive priority distributions in an aggregate amount equal to $476.0 million and up to an additional $89.0 million from participation in subsequent distributions of cash depending on the performance of the Great Park Venture. The holders of the Percentage Interests will receive all other distributions. The Operating Company owns 37.5% of the Great Park Venture’s Percentage Interests as of December 31, 2019. The Great Park Venture has made distributions to the holders of Legacy Interests in the aggregate amount of $355.0 million as of December 31, 2019. In January 2020, the Great Park Venture made distributions to the holders of Legacy Interests in the aggregate amount of $76.3 million.
The Great Park Venture is the owner of Great Park Neighborhoods, a mixed-use, master-planned community located in Orange County, California. The Company, through the A&R DMA, manages the planning, development and sale of the Great Park Neighborhoods and supervises the day-to-day affairs of the Great Park Venture. The Great Park Venture is managed by an executive committee of representatives appointed by only the holders of Percentage Interests. The Company serves as the administrative member but does not control the actions of the executive committee. During the year ended December 31, 2019, the Great Park Venture recognized $133.3 million in land sale revenues to a related party of the Company and $137.7 million in land sale revenues to third parties, of which $31.0 million relates to homesites sold to a land banking entity whereby a related party of the Company has retained the option to acquire these homesites in the future from the land banking entity. During the years ended December 31, 2018 and 2017, the Great Park Venture recognized $3.9 million and $7.7 million, respectively in related party land sale revenues.
The cost of the Company’s investment in the Great Park Venture is higher than the Company’s underlying equity in the carrying value of net assets of the Great Park Venture (basis difference). The Company’s earnings from the equity method investment are adjusted by amortization and accretion of the basis differences as the assets (mainly inventory) and liabilities that gave rise to the basis difference are sold, settled or amortized.
The following table summarizes the statement of operations of the Great Park Venture for the years ended December 31, 2019, 2018 and 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Land sale revenues
|
$
|
270,970
|
|
|
$
|
175,689
|
|
|
$
|
480,934
|
|
Cost of land sales
|
(179,836
|
)
|
|
(118,115
|
)
|
|
(339,100
|
)
|
Other costs and expenses
|
(56,248
|
)
|
|
(54,506
|
)
|
|
(105,772
|
)
|
Net income of Great Park Venture
|
$
|
34,886
|
|
|
$
|
3,068
|
|
|
$
|
36,062
|
|
The Company’s share of net income
|
$
|
13,082
|
|
|
$
|
1,151
|
|
|
$
|
13,523
|
|
Basis difference amortization
|
(6,900
|
)
|
|
(2,057
|
)
|
|
(7,763
|
)
|
Equity in earnings (loss) from Great Park Venture
|
$
|
6,182
|
|
|
$
|
(906
|
)
|
|
$
|
5,760
|
|
The following table summarizes the balance sheet data of the Great Park Venture and the Company’s investment balance as of December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Inventories
|
$
|
870,861
|
|
|
$
|
1,059,717
|
|
Cash and cash equivalents
|
293,002
|
|
|
60,663
|
|
Receivable and other assets
|
32,395
|
|
|
33,836
|
|
Total assets
|
$
|
1,196,258
|
|
|
$
|
1,154,216
|
|
Accounts payable and other liabilities
|
$
|
159,965
|
|
|
$
|
152,809
|
|
Distribution payable to Legacy Interests
|
76,272
|
|
|
—
|
|
Redeemable Legacy Interests
|
133,695
|
|
|
209,967
|
|
Capital (Percentage Interest)
|
826,326
|
|
|
791,440
|
|
Total liabilities and capital
|
$
|
1,196,258
|
|
|
$
|
1,154,216
|
|
The Company’s share of capital in Great Park Venture
|
$
|
309,872
|
|
|
$
|
296,790
|
|
Unamortized basis difference
|
121,963
|
|
|
128,863
|
|
The Company’s investment in the Great Park Venture
|
$
|
431,835
|
|
|
$
|
425,653
|
|
Gateway Commercial Venture
On August 4, 2017, the Company entered into the Limited Liability Company Agreement of Five Point Office Venture Holdings I, LLC, a Delaware limited liability company (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.
The Gateway Commercial Venture owns the Five Point Gateway Campus located in Irvine, California and acquired the Five Point Gateway Campus through debt and capital funding. The debt obtained by the Gateway Commercial Venture is non-recourse to the Company other than in the case of customary “bad act” exceptions or bankruptcy or insolvency events.
The Company and a related party of the Company separately lease office space at the Five Point Gateway Campus, and during the years ended December 31, 2019 and 2018, the Gateway Commercial Venture recognized $8.3 million and $1.1 million in rental revenues from those leasing arrangements.
The following table summarizes the statement of operations of the Gateway Commercial Venture for the years ended December 31, 2019, 2018 and from August 4, 2017 (the date of our initial investment) to December 31, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Rental revenues
|
$
|
34,157
|
|
|
$
|
26,580
|
|
|
$
|
9,245
|
|
Rental operating and other expenses
|
(7,304
|
)
|
|
(4,963
|
)
|
|
(1,091
|
)
|
Depreciation and amortization
|
(15,101
|
)
|
|
(11,730
|
)
|
|
(4,504
|
)
|
Interest expense
|
(16,892
|
)
|
|
(11,563
|
)
|
|
(3,629
|
)
|
Net (loss) income of Gateway Commercial Venture
|
$
|
(5,140
|
)
|
|
$
|
(1,676
|
)
|
|
$
|
21
|
|
Equity in (loss) earnings from Gateway Commercial Venture
|
$
|
(3,855
|
)
|
|
$
|
(1,257
|
)
|
|
$
|
16
|
|
The following table summarizes the balance sheet data of the Gateway Commercial Venture and the Company’s investment balance as of December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Real estate and related intangible assets, net
|
$
|
451,988
|
|
|
$
|
464,123
|
|
Other assets
|
21,410
|
|
|
14,833
|
|
Total assets
|
$
|
473,398
|
|
|
$
|
478,956
|
|
Notes payable, net
|
$
|
302,344
|
|
|
$
|
295,440
|
|
Other liabilities, net
|
35,848
|
|
|
40,521
|
|
Members’ capital
|
135,206
|
|
|
142,995
|
|
Total liabilities and capital
|
$
|
473,398
|
|
|
$
|
478,956
|
|
The Company’s investment in the Gateway Commercial Venture
|
$
|
101,404
|
|
|
$
|
107,246
|
|
5. NONCONTROLLING INTERESTS
The Holding Company’s wholly owned subsidiary is the managing general partner of the Operating Company and at December 31, 2019, the Holding Company and its wholly owned subsidiary owned approximately 62.4% of the outstanding Class A Common Units and 100% of the outstanding Class B Common Units of the Operating Company. The Holding Company consolidates the financial results of the Operating Company and its subsidiaries and records a noncontrolling interest for the remaining 37.6% of the outstanding Class A Common Units of the Operating Company.
After a 12 month holding period, holders of Class A Common Units of the Operating Company may exchange their units for, at the Company’s option, either (i) Class A common shares on a one-for-one basis (subject to adjustment in the event of share splits, distributions of shares, warrants or share rights, specified extraordinary distributions and similar events), or (ii) cash in an amount equal to the market value of such shares at the time of exchange. Whether such units are acquired by the Company in exchange for Class A common shares or for cash, if the holder also owns Class B common shares, then an equal number of that holder’s Class B common shares will automatically convert into Class A common shares, at a ratio of 0.0003 Class A common shares for each Class B
common share. This exchange right is currently exercisable by all holders of outstanding Class A Common Units of the Operating Company.
The San Francisco Venture, the entity developing the Candlestick and The San Francisco Shipyard communities, has three classes of units—Class A units, Class B units and Class C units. The Operating Company acquired a controlling interest in the San Francisco Venture in May 2016 by acquiring all of the outstanding Class B units of the San Francisco Venture (the “Formation Transaction”). All of the outstanding Class A units are owned by affiliates of Lennar and affiliates of Castlelake, LP (“Castlelake”). The Class A units of the San Francisco Venture are intended to be substantially economically equivalent to the Class A Common Units of the Operating Company. The Class A units of the San Francisco Venture represent noncontrolling interests to the Operating Company.
Holders of Class A units of the San Francisco Venture can redeem their units at any time and receive Class A Common Units of the Operating Company on a one-for-one basis (subject to adjustment in the event of share splits, distributions of shares, warrants or share rights, specified extraordinary distributions and similar events). If a holder requests a redemption of Class A units that would result in the Holding Company’s ownership of the Operating Company falling below 50.1%, the Holding Company has the option of satisfying the redemption with Class A common shares instead. The Company also has the option, at any time, to acquire outstanding Class A units of the San Francisco Venture in exchange for Class A Common Units of the Operating Company. The 12 month holding period for any Class A Common Units of the Operating Company issued in exchange for Class A units of the San Francisco Venture is calculated by including the period that such Class A units of the San Francisco Venture were owned. This exchange right is currently exercisable by substantially all holders of outstanding Class A units of the San Francisco Venture.
Concurrent with the termination of the Retail Project (defined in Note 9), the San Francisco Venture issued 436,498 Class A units (and the Holding Company issued 436,498 of its Class B common shares) to, and received a contribution of $5.5 million from, the holders of Class A units of the San Francisco Venture.
On February 13, 2019, the San Francisco Venture issued 25.0 million new Class C units to an affiliate of Lennar in exchange for a contribution of $25.0 million to the San Francisco Venture. Provided that Lennar completes the construction of a certain number of new homes in Candlestick as contemplated under purchase and sale agreements with the Company, the San Francisco Venture is required to redeem the Class C units if and when the Company receives reimbursements from the Mello-Roos communities facilities district formed for the development, in an aggregate amount equal to 50% of any reimbursements up to a maximum amount of $25.0 million. The San Francisco Venture also maintains the ability to redeem the then outstanding balance of Class C units for cash at any time. Upon a liquidation of the San Francisco Venture, the holders of Class C Units are entitled to a liquidation preference in an aggregate amount equal to 50% of the cumulative amount of reimbursements received, less the aggregate amount previously paid to redeem Class C units. The maximum amount payable by the San Francisco Venture pursuant to redemptions or liquidation of the Class C units is $25.0 million. The holders of Class C units are not entitled to receive any other forms of distributions and are not entitled to any voting rights. In connection with the issuance of the Class C units, the San Francisco Venture agreed to spend $25.0 million on the development of infrastructure and/or parking facilities at the Company’s Candlestick development. At December 31, 2019, $25.0 million of Class C units are outstanding and included in redeemable noncontrolling interest on the consolidated balance sheet.
Net income (loss) 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 income (loss) 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 a result, such equity transactions result in an adjustment between members’ capital and the noncontrolling interest in the Company’s consolidated balance sheets and statements of capital to account for the changes in the noncontrolling interest ownership percentage as well as any change in total net assets of the Company.
During the years ended December 31, 2019, and 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.
6. CONSOLIDATED VARIABLE INTEREST ENTITY
The Holding Company conducts all of its operations through the Operating Company, a consolidated VIE, and as a result, substantially all of the Company’s assets and liabilities represent the assets and liabilities of the Operating Company, other than items attributed to income taxes and the payable pursuant to a tax receivable agreement (“TRA”), which was $172.6 million and $169.5 million at December 31, 2019 and 2018 respectively. The Operating Company has investments in and consolidates the assets and liabilities of the San Francisco Venture, FP LP and Five Point Land, LLC (“FPL”), all of which have also been determined to be VIEs.
The San Francisco Venture is a VIE as the other members of the venture, individually or as a group, are not able to exercise kick-out rights or substantive participating rights. The Company applied the variable interest model and determined that it is the primary beneficiary of the San Francisco Venture and, accordingly, the San Francisco Venture is consolidated in its results. In making that determination, the Company evaluated that the Operating Company has unilateral and unconditional power to make decisions in regards to the activities that significantly impact the economics of the VIE, which are the development of properties, marketing and sale of properties, acquisition of land and other real estate properties and obtaining land ownership or ground lease for the underlying properties to be developed. The Company is determined to have more-than-insignificant economic benefit from the San Francisco Venture because, excluding Class C units, the Operating Company can prevent or cause the San Francisco Venture from making distributions on its units, and the Operating Company would receive 99% of any such distributions (assuming no distributions had been paid on the Class A Common Units of the Operating Company). In addition, the San Francisco Venture is only allowed to make a capital call on the Operating Company and not any other interest holders, which could be a significant financial risk to the Operating Company.
As of December 31, 2019, the San Francisco Venture had total assets of $1,197.1 million, primarily comprised of $1,186.2 million of inventories, $2.2 million in related party assets and $1.3 million in cash and total liabilities of $119.2 million including $102.4 million in related party liabilities.
As of December 31, 2018, the San Francisco Venture had total assets of $1,151.4 million, primarily comprised of $1,137.0 million of inventories and $12.3 million in cash and total liabilities of $260.8 million including $168.9 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’s operating subsidiaries are not guarantors of the Company’s obligations, and the assets held by the San Francisco Venture may only be used as collateral for the San Francisco Venture’s obligations. The creditors of the San Francisco Venture do not have recourse to the assets of the Operating Company, as the VIE’s primary beneficiary, or of the Holding Company.
The Company and other partners do not generally have an obligation to make capital contributions to the San Francisco Venture. In addition, there are no liquidity arrangements or agreements to fund capital or purchase assets that could require the Company to provide financial support to the San Francisco Venture. The Company does not guarantee any debt of the San Francisco Venture. However, the Operating Company has guaranteed the performance of payment by the San Francisco Venture in accordance with the redemption terms of the Class C units of the San Francisco Venture (see Note 5).
FP LP and FPL, the entity developing Valencia (formerly known as Newhall Ranch), 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 December 31, 2019, FP LP and FPL had combined assets of $900.0 million, primarily comprised of $703.6 million of inventories, $80.4 million of intangibles, $72.3 million in related party assets and $0.5 million in cash, and total combined liabilities of $126.8 million, including $117.6 million in accounts payable and other liabilities and $9.2 million in related party liabilities.
As of December 31, 2018, FP LP and FPL had combined assets of $745.3 million, primarily comprised of $559.1 million of inventories, $95.9 million of intangibles, $54.3 million in related party assets and $0.1 million in cash, and total combined liabilities of $118.1 million, including $108.6 million in accounts payable and other liabilities and $9.5 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 years ended December 31, 2019, 2018 and 2017, respectively, there were no VIEs that were deconsolidated.
7. PROPERTIES AND EQUIPMENT, NET
Properties and equipment as of December 31, 2019 and 2018 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Agriculture operating properties and equipment
|
$
|
30,016
|
|
|
$
|
29,975
|
|
Other
|
9,116
|
|
|
7,166
|
|
Total properties and equipment
|
39,132
|
|
|
37,141
|
|
Accumulated depreciation
|
(6,820
|
)
|
|
(5,464
|
)
|
Properties and equipment, net
|
$
|
32,312
|
|
|
$
|
31,677
|
|
Depreciation expense was $1.2 million, $0.8 million and $1.1 million for the years ended December 31, 2019, 2018 and 2017 respectively.
The 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 consolidated statement of operations for the year ended December 31, 2018. The property was operated by the Company as an amenity to the Valencia (formerly Newhall) segment’s fully developed community and the gain on the sale is included in Valencia segment’s results for the year ended December 31, 2018.
8. INTANGIBLE ASSET, NET—RELATED PARTY
The intangible asset relates to the contract value of the incentive compensation provisions of the A&R DMA with the Great Park Venture. The intangible asset will be amortized over the contract period based on the pattern in which the economic benefits are expected to be received.
The carrying amount and accumulated amortization of the intangible asset as of December 31, 2019 and 2018 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Gross carrying amount
|
$
|
129,705
|
|
|
$
|
129,705
|
|
Accumulated amortization
|
(49,355
|
)
|
|
(33,788
|
)
|
Net book value
|
$
|
80,350
|
|
|
$
|
95,917
|
|
Intangible asset amortization expense, as a result of revenue recognition attributable to incentive compensation, was $15.6 million and $12.5 million for the years ended December 31, 2019, and 2018, respectively. No amortization expense was recorded for the year ended December 31, 2017, as the Company did not recognize
any economic benefits from incentive compensation. Amortization expense is included in the cost of management services in the accompanying consolidated statements of operations.
9. RELATED PARTY TRANSACTIONS
Related party assets and liabilities included in the Company’s consolidated balance sheets as of December 31, 2019 and 2018 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Related Party Assets:
|
|
|
|
Contract assets (see Note 3)
|
$
|
68,133
|
|
|
$
|
49,834
|
|
Prepaid rent
|
—
|
|
|
5,972
|
|
Operating lease right-of-use asset (see Note 2 and Note 12)
|
23,047
|
|
|
—
|
|
Other
|
6,381
|
|
|
5,233
|
|
|
$
|
97,561
|
|
|
$
|
61,039
|
|
Related Party Liabilities:
|
|
|
|
Reimbursement obligation
|
$
|
102,403
|
|
|
$
|
102,692
|
|
Contingent consideration—Mall Venture project property
|
—
|
|
|
64,870
|
|
Payable to holders of Management Company’s Class B interests
|
9,000
|
|
|
9,000
|
|
Operating lease liability (see Note 2 and Note 12)
|
16,282
|
|
|
—
|
|
Other
|
197
|
|
|
1,978
|
|
|
$
|
127,882
|
|
|
$
|
178,540
|
|
Development Management Agreement with the Great Park Venture (Incentive Compensation Contract Asset)
In 2010, the Great Park Venture, the Company’s equity method investee, engaged the Management Company under a development management agreement to provide management services to the Great Park Venture. The compensation structure in place as per the A&R DMA consists of a base fee and incentive compensation. The base fee consists of a fixed annual fee and a variable fee equal to general and administrative costs incurred by the Management Company on behalf of the Great Park Venture. Incentive compensation is characterized as “Legacy Incentive Compensation” and “Non-Legacy Incentive Compensation.” The Legacy Incentive Compensation consists of the following: (i) $15.2 million, which was received by the Management Company on May 2, 2016; (ii) $43.1 million received by the Management Company on January 3, 2017; and (iii) a maximum of $9.0 million of incentive compensation payments attributed to contingent payments made under a cash flow participation agreement the Great Park Venture is a party to. Generally, the Non-Legacy Incentive Compensation is 9% of distributions made by the Great Park Venture, as defined in the A&R DMA, excluding the distributions to the holders of Legacy Interests of $565.0 million (see Note 4).
For the years ended December 31, 2019, 2018 and 2017, the Company recognized revenue from management services of $36.9 million, $35.1 million and $16.2 million, respectively, related to all management fees under the A&R DMA and such revenues are included in management services—related party in the accompanying consolidated statements of operations. At December 31, 2019 and 2018, included in contract assets in the table above is $66.1 million and $47.7 million, respectively, attributed to Legacy and Non-Legacy Incentive Compensation. At December 31, 2019 and 2018, the Company had a receivable from the Great Park Venture of $3.6 million and $3.0 million, respectively, related to cost reimbursements under the A&R DMA. The receivable amounts are included in other related party assets in the table above. The current term of the A&R DMA ends in December 2021 and provides for term extensions at the mutual agreement of terms and provisions by both the Company and the Great Park Venture.
Operating Lease Right-of-Use Asset and Operating Lease Liability
The Company leases corporate office space at the Five Point Gateway Campus. Upon adoption of ASC Topic 842, Leases (see Note 2 and Note 12), the Company recognized an operating lease right-of-use asset and operating lease liability pertaining to this related party lease. Existing prepaid rent of $6.0 million was reclassified to be included in the measurement of the operating lease right-of-use asset on January 1, 2019.
Indirect Legacy Interest in Great Park Venture
In June 2018, the Company purchased an indirect interest in rights to certain Legacy Interests in the Great Park Venture through an equity method investment that were held by the Company’s CEO, Emile Haddad. At both December 31, 2019 and 2018, the carrying value of the purchased interests was $1.8 million and is included in other related party assets in the table above.
Retail Project and Contingent Consideration to Class A Members of the San Francisco Venture
Prior to the Company’s acquisition of The San Francisco Venture, 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. The principal terms of the Separation Agreement, as it relates to the Retail Project (defined below) included the following:
• Once a final subdivision map was recorded, title to a parking structure parcel at Candlestick (“CP Parking Parcel”) was to be conveyed to CPHP, and CPHP was to assume the obligation to construct the parking structure and certain other improvements at Candlestick;
• CPHP was transferred the membership interest in Candlestick Retail Member, LLC, (“Mall Venture Member”), the entity that had 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 was to construct on the CP Parking Parcel; and
• Once a final subdivision map was recorded, the San Francisco Venture was to convey to the Mall Venture the property on which the Retail Project was to be built (the “Retail Project Property”).
Under the terms of the Separation Agreement, the San Francisco Venture retained the obligation to subdivide and convey the Retail Project Property to the Mall Venture and the CP Parking Parcel to CPHP. The obligation to convey the parcels represented additional consideration to the former owners of the San Francisco Venture and was recognized as contingent consideration.
In early 2019, after discussions between the Company, CPHP and the Macerich Member, the parties determined not to proceed with the Retail Project. As a result of terminating the Retail Project and agreements related thereto, the obligation of the San Francisco Venture to convey the CP Parking Parcel and the Retail Project Property was terminated, and the San Francisco Venture was also released from certain development obligations, which resulted in a gain of $64.9 million for the year ended December 31, 2019.
Reimbursement Obligation
The San Francisco Venture has entered into reimbursement agreements for which it has agreed to reimburse CPHP or its subsidiaries for a portion of the EB-5 loan liabilities and related interest that were assumed by CPHP or its subsidiaries pursuant to the Separation Agreement. At December 31, 2019 and 2018, the balance of the reimbursement obligation to CPHP or its subsidiaries was $102.4 million and $102.7 million, respectively. Interest is paid monthly and totaled $4.2 million for each of the years ended December 31, 2019, 2018 and 2017. All of the incurred interest for the years ended December 31, 2019, 2018 and 2017 was capitalized into inventories as interest on development and construction costs. The weighted average interest rate as of December 31, 2019 was 4.1%. Subject to certain extension, principal payments of $95.0 million, $4.2 million and $3.2 million are expected to be due in 2020, 2021 and 2022, respectively.
Payables to Holders of Management Company’s Class B Interests
Holders of the Management Company’s Class B interests are entitled to receive all distributions from the Management Company that are attributable to any Legacy Incentive Compensation received by the Management Company. The Management Company made a $43.1 million payment to the holders of Class B interests of the Management Company in January 2017 in connection with the Management Company’s January 2017 collection of Legacy Incentive Compensation in the same amount. No payments were made during the years ended December 31, 2019 and 2018.
San Francisco Bay Area Development Management Agreements
The Company has entered into development management agreements with affiliates of Lennar and Castlelake in which the Company will provide certain development management services to various real estate development projects located in the San Francisco Bay area. The agreements generally consist of a fixed management fee and in some cases a variable fee equal to general and administrative costs incurred by the Company. In most cases the management agreements terminate upon project development milestones. For the years ended December 31, 2019, 2018 and 2017, the Company recognized revenue from these management services of $2.4 million, $4.4 million and $5.8 million, respectively. Revenues related to management fees under the San Francisco Bay area development management agreements are included in management services—related party in the accompanying consolidated statements of operations.
Gateway Commercial Venture Property Management Agreement
The Company has entered into a property management agreement with Gateway Commercial Venture in which the Company will provide certain property management services to the Five Point Gateway Campus. The agreement consists of a base management fee, calculated as the greater of a determined fixed value or percentage of gross rent, plus additional fees, when applicable, pertaining to management of tenant improvements and securing tenants. For the years ended December 31, 2019, 2018, and 2017, the Company recognized revenue from these management services of $0.3 million, $1.5 million and $0.5 million, respectively, which is included in management services—related party in the accompanying consolidated statement of operations.
Valencia Purchase and Sale Agreements
The Company entered into a purchase and sale agreement with a land banking entity during the year ended December 31, 2019 for the sale of 711 homesites on approximately 59 acres. Initial gross proceeds were $135.2 million, representing the base purchase price, and the Company also recognized $4.7 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that the Company expects to be entitled to receive. A related party of the Company has retained the option to acquire these homesites in the future from the land banking entity.
Candlestick Purchase and Sale Agreements
The San Francisco Venture has entered into purchase and sale agreements with an affiliate of Lennar and Castlelake to sell homesites at Candlestick including one agreement for 3.6 acres of land where up to 390 for-sale homesites are planned to be built and one agreement for land that includes additional airspace parcels above the planned Retail Project where multi-family homesites were planned to be built. The Company was required to complete certain conditions prior to the close of escrow of the sale of the airspace parcels above the planned Retail Project, including recording the subdivision of the land and airspace parcels into separate legal parcels. The San Francisco Venture closed escrow on the for-sale homesites in January 2017 resulting in gross proceeds of $91.4 million. In connection with the termination of the Retail Project in early 2019 described above, the purchase and sale agreement for the planned multi-family homesites was terminated.
Entitlement Transfer Agreement
In December 2016, the San Francisco Venture entered into an agreement with an affiliate of Lennar and Castlelake pursuant to which an affiliate of Lennar and Castlelake agreed to transfer to the San Francisco Venture entitlements for the right to construct (1) at least 172 homesites (or, if greater, the number of entitled homesites that are not developed or to be developed by or on behalf of the Successor to the Redevelopment Agency of the City and County of San Francisco (the “San Francisco Agency”) or by residential developers on the land transferred to CPHP) and (2) at least 70,000 square feet of retail space (or, if greater, the amount of entitled retail space that is not developed or to be developed by or on behalf of the San Francisco Agency or by commercial developers on the land transferred to CPHP) for use in the development of other portions of Candlestick and The San Francisco Shipyard. The Company successfully received the necessary government approvals to effectuate the transfer of the entitlements in 2018, relinquished its rights to certain variable consideration related to Candlestick purchase and sale agreements, and received the additional entitlements (see Note 3).
10. NOTES PAYABLE, NET
At December 31, 2019 and 2018, notes payable consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
7.875 % Senior Notes due 2025
|
$
|
625,000
|
|
|
$
|
500,000
|
|
Macerich Note
|
—
|
|
|
65,130
|
|
Unamortized debt issuance costs and discount
|
(8,954
|
)
|
|
(8,126
|
)
|
|
$
|
616,046
|
|
|
$
|
557,004
|
|
Senior Notes
In November 2017, the Operating Company and Five Point Capital Corp., a directly wholly owned subsidiary of the Operating Company (the “Co-Issuer” and, together with the Operating Company, the “Issuers”), offered, sold and issued $500.0 million aggregate principal amount of 7.875% unsecured senior notes due November 15, 2025 at 100% of par (the “Original Notes”). Proceeds from the offering, after underwriting fees and offering expenses were $490.7 million. In July 2019, the Issuers offered, sold and issued $125.0 million aggregate principal amount of 7.875% unsecured senior notes as a further issuance of the Original Notes (the “Add-On Notes”). The terms of the Add-On Notes are identical to the Original Notes (the Add-On Notes and, together with the Original Notes, the “Senior Notes”). The Add-On Notes were issued at par plus pre-issuance interest that had accrued from May 15, 2019 to the issuance date. Proceeds from the offering of the Add-On Notes, after underwriting fees and offering expenses and excluding pre-issuance accrued interest was $122.8 million.
Interest on the Senior Notes is payable on May 15 and November 15 of each year. Interest incurred, including amortization of debt issuance costs, on the Senior Notes during the years ended December 31, 2019, 2018 and 2017 totaled $45.0 million, $39.8 million, and $4.6 million, respectively. All interest incurred was capitalized to inventories for all three years.
The Senior Notes are redeemable at the option of the Issuers, in whole or in part, at any time, and from time to time, on or after November 15, 2020, at a declining call premium as set forth in the indenture governing the Senior Notes, plus accrued and unpaid interest. In addition, at any time prior to November 15, 2020, the issuers may redeem some or all of the Senior Notes at a price equal to 100% of the aggregate principal amount of the Senior Notes redeemed, plus a “make-whole” premium, plus accrued and unpaid interest. Lastly, prior to November 15, 2020, the Issuers may redeem up to 35% of the aggregate principal amount of the Senior Notes with an amount equal to the net cash proceeds from certain new equity offerings, at a redemption price equal to 107.875% of the aggregate principal amount thereof, plus accrued and unpaid interest.
The Senior Notes are guaranteed jointly and severally, by certain direct and indirect subsidiaries of the Operating Company (the “Guarantors”, other than the Co-Issuer), however the Operating Company’s non-guarantor subsidiaries represent substantially all of the operations and total assets of the Issuers. The Senior Notes are senior in right of payment to all of the Issuers’ and Guarantors’ subordinated indebtedness, equal in right of payment with all of the Issuers’ and the Guarantors’ senior indebtedness, without giving effect to collateral arrangements in the case of secured indebtedness, and effectively subordinated to any of the Issuers’ and the Guarantors’ secured indebtedness, to the extent of the value of the assets securing such indebtedness.
Macerich Note
On November 13, 2014, in connection with entering into the Mall Venture and Mall DAA, a wholly-owned subsidiary of the San Francisco Venture issued a promissory note (the “Macerich Note”) to an affiliate of the Macerich Member in the amount of $65.1 million, bearing interest at 360-day LIBOR plus 2.0% (5.01% at December 31, 2018). It was anticipated that upon completion of certain conditions, including the conveyance of the Retail Project Property to the Mall Venture, the Macerich Member, in several steps, would cause the Macerich Note to be distributed to the Company, resulting in the extinguishment of the Macerich Note. However, in early 2019, in connection with the termination of the Retail Project (see Note 9), the Company repaid the $65.1 million Macerich Note and settled outstanding accrued interest thereon of approximately $11.1 million. Concurrently, the San Francisco Venture received a contribution of approximately $5.5 million from the members of CPHP (affiliates of Lennar and Castlelake).
Revolving Credit Facility
In May 2019, the Operating Company entered into the second amendment to its revolving credit facility (the “Revolving Credit Facility”) which, among other things, extended the maturity date of the Revolving Credit Facility from April 2020 to April 2022, with one option to extend the maturity date by an additional year, subject to the satisfaction of certain conditions including the approval of the administrative agent and lenders. The aggregate commitment remains at $125.0 million, with an accordion feature that allows the Operating Company to request to increase the maximum aggregate amount by up to $50.0 million to $175.0 million, subject to certain conditions, including receipt of commitments. Any borrowings continue to bear interest at LIBOR plus a margin ranging 1.75% to 2.00% based on the Company’s leverage ratio. As of December 31, 2019, no funds have been drawn on the Revolving Credit Facility, however letters of credit of $1.0 million are issued and outstanding under the Revolving Credit Facility as of December 31, 2019, thus reducing the available capacity by the outstanding letters of credit amount.
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, all the holders of Class A Units of the San Francisco Venture, and prior holders of Class A common Units of the Operating Company and prior holders of Class A Units of the San Francisco Venture that have exchanged their holdings for Class A common shares (as parties to the TRA, the “TRA Parties”). The TRA provides for payment by the Company to the TRA Parties or their successors of 85% of the amount of cash savings, if any, in income tax the Company realizes as a result of:
(a) Increases in the Company’s tax basis attributable to exchanges of Class A Common Units of the Operating Company for Class A common shares of the Company or cash or certain other taxable acquisitions of equity interests by the Operating Company.
The Company expects that basis adjustments resulting from these transactions, if they occur, are likely to reduce the amount of income tax the Company would otherwise be required to pay in the future.
(b) Allocations that result from the application of the principles of Section 704(c) of the Code.
Section 704(c) of the Code, and the U.S. Treasury regulations promulgated thereunder, require that items of income, gain, loss and deduction that are attributable to the Operating Company’s directly and indirectly held property, including property contributed to the Operating Company pursuant to the Formation Transactions and the property held by the Operating Company prior to the Formation Transactions, must be
allocated among the members of the Operating Company to take into account the difference between the fair market value and the adjusted tax basis of such assets on May 2, 2016. As a result, the Operating Company will be required to make certain special allocations of its items of income, gain, loss and deduction that are attributable to such assets. These allocations, like the increases in tax basis described above, are likely to reduce the amount of income tax the Company would otherwise be required to pay in the future.
(c) Tax benefits related to imputed interest or guaranteed payments deemed to be paid or incurred by the Company as a result of the TRA.
At December 31, 2019 and 2018, the Company’s consolidated balance sheets include liabilities of $172.6 million and $169.5 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) of the Code to be probable and estimable when an event occurs that results in the Company measuring the Operating Company’s direct 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 additional 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 additional liabilities under the TRA 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. During the year ended December 31, 2017, the Company adjusted its recorded TRA liability as a result of equity transactions during the period, including the IPO and private placement. Changes in the Company’s estimates of the utilization of its deferred tax attributes and tax rates in effect may also result in subsequent changes to the amount of TRA liabilities recorded. At the end of the 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law, which reduced the federal corporate tax rate from 35% to 21%. As a result of this reduction, the value of the benefit that the Company will receive from tax attributes and tax items that are the subject of the TRA was reduced and, as a result, the TRA liability was also reduced. During the year ended December 31, 2019, the Company adjusted its recorded TRA liability as a result of exchanges of Class A Common Units of the Operating Company for the Company’s Class A common shares as well as certain other equity transactions associated with share-based compensation. As a result of these changes, the value of the benefit that the Company will receive from tax attributes and tax items that are the subject of the TRA increased and, as a result, the TRA liability was increased.
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 years ended December 31, 2019, 2018 and 2017.
12. LEASES
The Company adopted ASU No. 2016-02 (see Note 2) effective on January 1, 2019 on a modified retrospective basis. Consequently, comparative prior periods presented in financial statements after adoption will continue to be in accordance with historical U.S. GAAP (Topic 840, Leases).
The Company’s lessee arrangements consist of agreements to lease certain office facilities and equipment and the Company’s lessor arrangements consists of leases of portions of its land to third parties for agriculture or other miscellaneous uses. The Company’s significant agricultural land lease agreements are short-term in nature. As of December 31, 2019, all leasing arrangements are classified as operating leases and do not contain residual value guarantees or material restrictions.
The components of lease costs were as follows for the year ended December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
2019
|
Operating lease cost
|
|
$
|
2,498
|
|
Related party operating lease cost
|
|
3,144
|
|
Short-term lease cost
|
|
527
|
|
Supplemental balance sheet information related to leases as of December 31, 2019 were as follows (in thousands, except lease term in years and discount rate):
|
|
|
|
|
|
|
|
2019
|
Operating lease right-of-use assets ($23,047 related party)
|
|
$
|
32,579
|
|
Operating lease liabilities ($16,282 related party)
|
|
$
|
27,206
|
|
Weighted average remaining lease term (operating lease)
|
|
7.1
|
|
Weighted average discount rate (operating lease)
|
|
5.9
|
%
|
Operating lease right-of-use assets are included in other assets or related party assets and operating lease liabilities are included in accounts payable and other liabilities or related party liabilities on the consolidated balance sheet. The Company’s office leases have remaining lease terms of four years to nine years and include one or more extension options to renew, some of which include options to extend the leases for up to ten years.
The table below reconciles the undiscounted cash flows to the operating lease liabilities recorded on the consolidated balance sheet as of December 31, 2019 (in thousands):
|
|
|
|
|
|
Years Ending December 31,
|
|
Rental
Payments
|
2020
|
|
$
|
4,634
|
|
2021
|
|
5,263
|
|
2022
|
|
5,420
|
|
2023
|
|
5,583
|
|
2024
|
|
2,495
|
|
Thereafter
|
|
10,570
|
|
Total lease payments
|
|
$
|
33,965
|
|
|
|
|
Discount
|
|
$
|
6,759
|
|
Total operating lease liabilities
|
|
$
|
27,206
|
|
As of December 31, 2018, minimum lease payments to be made under operating leases with initial terms in excess of one year under noncancelable leases are as follows (in accordance with the prior period presentation of ASC 840) (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
Rental
Payments
|
|
Rental
Receipts
|
2019
|
|
$
|
5,790
|
|
|
$
|
633
|
|
2020
|
|
4,846
|
|
|
556
|
|
2021
|
|
5,263
|
|
|
193
|
|
2022
|
|
5,420
|
|
|
145
|
|
2023
|
|
5,583
|
|
|
142
|
|
Thereafter
|
|
13,065
|
|
|
925
|
|
|
|
$
|
39,967
|
|
|
$
|
2,594
|
|
Rent expense (ASC 840) for the years ended December 31, 2018 and 2017 was $2.7 million and $2.7 million, respectively.
13. COMMITMENTS AND CONTINGENCIES
The Company is subject to the usual obligations associated with entering into contracts for the purchase, development, and sale of real estate, which the Company does in the routine conduct of its business. The operations of the Company are conducted through the Operating Company and its subsidiaries, and in some cases, the Holding Company will guarantee the performance of the Operating Company or its subsidiaries.
Valencia Project Approval Settlement
In September 2017, the Company reached a settlement with key national and state environmental and Native American organizations that were petitioners (the “Settling Petitioners”) in various legal challenges to Valencia’s regulatory approvals and permits (see Legal Proceedings below). As of December 31, 2019, the Company has recorded a liability, included in accounts payable and other liabilities in the accompanying consolidated balance sheets, of $17.7 million associated with certain obligations of the project approval settlement. The Holding Company has provided a guaranty to the Settling Petitioners for monetary payments due from the Company as required under the settlement. As of December 31, 2019, the remaining estimated maximum potential amount of monetary payments subject to the guaranty was $24.1 million with the final payment due in 2026. The Company did not reach a settlement with two local environmental organizations that have pending challenges to certain Valencia project approvals. See “Legal Proceedings” below.
Water Purchase Agreement
The Company is subject to a water purchase agreement requiring annual payments in exchange for the delivery of water for the Company’s exclusive use. The agreement has an initial 35-year term, which expires in 2039 with an option for a second 35-year term. During the year ended December 31, 2019, the Company made payments totaling $1.2 million under the agreement. The annual minimum payments for years 2020 to 2024 are $1.3 million, $1.3 million, $1.4 million, $1.4 million and $1.4 million, respectively. At December 31, 2019, the aggregate annual minimum payments remaining under the initial term total $35.1 million.
Valencia Infrastructure Project
In January 2012, the Company entered into an agreement with Los Angeles County, in which the Company will finance up to a maximum of $45.8 million for the construction costs of an interchange project that Los Angeles County is managing. The interchange project is a critical infrastructure project that will benefit Valencia. As of December 31, 2019, the Company has made aggregate payments of $37.0 million and the interchange project was completed in 2019. There is also a provision for the Company to pay Los Angeles County interest on defined unreimbursed construction costs incurred prior to the reimbursement payment. Upon the final payment, Los Angeles County will credit the Company, in the form of bridge and thoroughfare construction fee district fee credits, an amount equal to the Company’s actual payments, exclusive of any interest payments. These credits are eligible for application against future bridge and thoroughfare fees the Company may incur. At December 31, 2019 and 2018, the Company had $8.9 million and $7.6 million, respectively, included in accounts payable and other liabilities in the accompanying consolidated balance sheets, representing unreimbursed construction costs payable to Los Angeles County. The Company expects to make the final payment of $8.9 million in 2020.
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 was to 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 was to 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 failed 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 would have the right to terminate the joint venture, require the Company to repay the $65.1 million Macerich Note (see Note 10) and to pay certain termination fees (50% of such termination fees would be funded by CPHP). In such case, the Company would no longer be obligated to transfer the Retail Project Property to the Retail Project or the CP Parking Parcel to CPHP and instead would be obligated to issue 436,498 Class A Common Units of the Operating Company to CPHP or its designees and CPHP or its designees will purchase an equal amount 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 and in early 2019, the Retail Project was terminated (see Note 9). The Company repaid the Macerich Note, plus termination fees and issued affiliates of Lennar and Castlelake 436,498 Class A units of the San Francisco Venture that are redeemable for Class A Common Units of the Operating Company and sold to Lennar and Castlelake an equal number of Class B common shares at a price of $0.00633 per share. The Company is now redeveloping these parcels for alternative uses.
Candlestick Development Agreement
On May 2, 2016, the Company entered into a development agreement with CPHP whereby among other things, CPHP agreed to be responsible for all design and construction costs associated with the parking structure to be built on the CP Parking Parcel, up to $240.0 million, and the Company agreed to reimburse CPHP for design and construction costs in excess of $240.0 million. In early 2019, the development agreement was terminated by the Company and CPHP concurrent with the termination of the Retail Project (see Note 9).
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 $230.0 million and $73.5 million as of December 31, 2019 and 2018, respectively.
Candlestick and The San Francisco Shipyard Disposition and Development Agreement
The San Francisco Venture is a party to a disposition and development agreement with the San Francisco Agency in which the San Francisco Agency has agreed to convey portions of Candlestick and The San Francisco Shipyard to the San Francisco Venture for development. The San Francisco Venture has agreed to reimburse the San Francisco Agency for reasonable costs and expenses actually incurred and paid by the San Francisco Agency in performing its obligations under the disposition and development agreement. The San Francisco Agency can also earn a return of certain profits generated from the development and sale of Candlestick and The San Francisco Shipyard if certain thresholds are met. As of December 31, 2019 the thresholds had not been met.
At December 31, 2019, 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 December 31, 2019 and 2018, 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 December 31, 2019 and 2018, the Company had restricted cash and certificates of deposit of $1.4 million pledged as collateral under certain of the letters of credit agreements.
Legal Proceedings
Landmark Village/Mission Village
During the pendency of certain prior litigation involving the approval of the original environmental impact reports and related permits for the Landmark Village and Mission Village projects at Valencia, in July 2017, the Los Angeles County Board of Supervisors certified the final additional environmental analyses required as a result of a prior California Supreme Court decision regarding the original greenhouse gas analysis related to the projects and reapproved the Landmark Village and Mission Village projects and related permits. In August 2017, two petitioners, Santa Clarita Organization for Planning and the Environment and Friends of the Santa Clara River (collectively, “Non-Settling Petitioners”), who did not participate in a settlement of prior litigation involving the Company and certain other petitioners, filed a new petition for writ of mandate in the Los Angeles Superior Court. The petition challenged Los Angeles County’s July 2017 approvals of the Mission Village and Landmark Village environmental analyses and the two projects based on claims arising under the California Environmental Quality Act and the California Water Code. The Court held a hearing on the merits of the petition in September 2018. In December 2018, the Superior Court issued its written decision denying the Non-Settling Petitioners’ petition for writ of mandate. Thereafter, in January 2019, the Superior Court entered judgment on the petition for writ of mandate in favor of the County and the Company. In March 2019, the Non-Settling Petitioners filed an appeal of the Superior Court’s ruling. The Company cannot predict the outcome of the appeal at this time.
Hunters Point Litigation
In May 2018, residents of the Bayview Hunters Point neighborhood in San Francisco filed a putative class action in San Francisco Superior Court naming Tetra Tech, Inc. and Tetra Tech EC, Inc., an independent contractor hired by the U.S. Navy to conduct testing and remediation of toxic radiological waste at The San Francisco Shipyard (“Tetra Tech”), Lennar and the Company as defendants. The plaintiffs allege that, among other things, Tetra Tech fraudulently misrepresented its test results and remediation efforts. The plaintiffs are seeking damages against Tetra Tech and have requested an injunction to prevent the Company and Lennar from undertaking any development activities at The San Francisco Shipyard.
Since July 2018, a number of lawsuits have been filed in San Francisco Superior Court on behalf of homeowners in The San Francisco Shipyard, which name Tetra Tech, Lennar, the Company and the Company’s CEO, among others, as defendants. The plaintiffs allege that environmental contamination issues at The San Francisco Shipyard were not properly disclosed to them before they purchased their homes. They also allege that Tetra Tech and other defendants (not including the Company) have created a nuisance at The San Francisco Shipyard under California law. They seek damages as well as certain declaratory relief.
All of these cases have been removed to the U.S. District Court for the Northern District of California. The Company believes that it has meritorious defenses to the allegations in all of these cases and may have insurance and indemnification rights against third parties, including related parties, with respect to these claims. Given the preliminary nature of these claims, the Company cannot predict the outcome of these matters.
Other
Other than the actions outlined above, the Company is also a party to various other claims, legal actions, and complaints arising in the ordinary course of business, the disposition of which, in the Company’s opinion, will not have a material adverse effect on the Company’s consolidated financial statements.
As a significant land owner and developer of unimproved land it is possible that environmental contamination conditions could exist that would require the Company to take corrective action. In the opinion of the Company, such corrective actions, if any, would not have a material adverse effect on the Company’s consolidated financial statements.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended December 31, 2019, 2018 and 2017 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
Cash paid for interest, all of which was capitalized to inventories
|
$
|
57,654
|
|
|
$
|
43,892
|
|
|
$
|
4,211
|
|
|
|
|
|
|
|
NONCASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
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
|
$
|
458
|
|
|
$
|
30,088
|
|
|
$
|
—
|
|
Purchase of properties and equipment in accounts payable and other liabilities
|
$
|
381
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Recognition of TRA liability
|
$
|
3,124
|
|
|
$
|
18,963
|
|
|
$
|
56,216
|
|
Supplemental cash flow information related to leases for the year ended December 31, 2019 is as follows (in thousands):
|
|
|
|
|
|
2019
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
$
|
6,306
|
|
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows for the years ended December 31, 2019, 2018 and 2017 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Cash and cash equivalents
|
$
|
346,833
|
|
|
$
|
495,694
|
|
|
$
|
848,478
|
|
Restricted cash and certificates of deposit
|
1,741
|
|
|
1,403
|
|
|
1,467
|
|
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows
|
$
|
348,574
|
|
|
$
|
497,097
|
|
|
$
|
849,945
|
|
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.
15. SEGMENT REPORTING
The Company’s reportable segments consist of:
• Valencia (formerly Newhall)—includes the community of Valencia (formerly known as Newhall Ranch) planned for development in northern Los Angeles County, California. The Valencia segment derives revenues from the sale of residential and commercial land sites to homebuilders, commercial developers and commercial buyers in addition to ancillary operations of operating properties.
• San Francisco—includes the Candlestick and The San Francisco Shipyard communities located on bayfront property in the City of San Francisco, California. The San Francisco segment derives revenues from the sale of residential and commercial land sites to homebuilders, commercial developers and commercial buyers in addition to management services provided to affiliates of a related party.
• Great Park—includes 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 December 31, 2019, the Company had a 37.5% Percentage Interest in the Great Park Venture and accounted for the investment under the equity method. The reported segment information for the Great Park segment includes the results of 100% of the Great Park Venture at the historical basis of the venture, which did not apply push down accounting at acquisition date. The Great Park segment derives revenues from the sale of residential and commercial land sites to homebuilders, commercial developers and commercial buyers, and management services provided by the Company to the Great Park Venture.
• Commercial—includes Five Point Gateway Campus, an office and research and development campus within the Great Park Neighborhoods, consisting of four newly constructed buildings. Two of the four buildings are leased to one tenant under a 20-year triple net lease which commenced in August 2017. The Company and a subsidiary of Lennar have entered into separate 130-month full service gross leases to occupy a portion of the other two buildings. This segment also includes property management services provided by the Management Company to the Gateway Commercial Venture, the entity that owns the Five Point Gateway Campus. As of December 31, 2019, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2019
|
|
(in thousands)
|
|
Valencia
|
|
San Francisco
|
|
Great Park
|
|
Commercial
|
|
Total reportable segments
|
|
Removal of Great Park Venture (1)
|
|
Removal of Gateway Commercial Venture (1)
|
|
Add investment in Great Park Venture
|
|
Add investment in Gateway Commercial Venture
|
|
Other eliminations (2)
|
|
Corporate and unallocated (3)
|
|
Total Consolidated
|
Revenues
|
$
|
143,190
|
|
|
$
|
3,995
|
|
|
$
|
307,843
|
|
|
$
|
34,479
|
|
|
$
|
489,507
|
|
|
$
|
(270,970
|
)
|
|
$
|
(34,157
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
184,380
|
|
Depreciation and amortization
|
286
|
|
|
215
|
|
|
15,567
|
|
|
15,100
|
|
|
31,168
|
|
|
—
|
|
|
(15,100
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
740
|
|
|
16,808
|
|
Interest income
|
1
|
|
|
—
|
|
|
3,489
|
|
|
—
|
|
|
3,490
|
|
|
(3,489
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,843
|
|
|
7,844
|
|
Interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
16,892
|
|
|
16,892
|
|
|
—
|
|
|
(16,892
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Segment profit (loss)/net profit (loss)
|
25,780
|
|
|
49,890
|
|
|
44,369
|
|
|
(4,818
|
)
|
|
115,221
|
|
|
(34,886
|
)
|
|
5,140
|
|
|
6,182
|
|
|
(3,855
|
)
|
|
—
|
|
|
(65,534
|
)
|
|
22,268
|
|
Other significant items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
748,082
|
|
|
1,197,081
|
|
|
1,356,417
|
|
|
473,409
|
|
|
3,774,989
|
|
|
(1,196,258
|
)
|
|
(473,398
|
)
|
|
431,835
|
|
|
101,404
|
|
|
(8,310
|
)
|
|
374,438
|
|
|
3,004,700
|
|
Inventory assets and real estate related assets, net
|
703,587
|
|
|
1,186,174
|
|
|
870,861
|
|
|
451,988
|
|
|
3,212,610
|
|
|
(870,861
|
)
|
|
(451,988
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,889,761
|
|
Expenditures for long-lived assets (4)
|
241,410
|
|
|
49,421
|
|
|
(9,487
|
)
|
|
2,924
|
|
|
284,268
|
|
|
9,487
|
|
|
(2,924
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,808
|
|
|
292,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2018
|
|
(in thousands)
|
|
Valencia
|
|
San Francisco
|
|
Great Park
|
|
Commercial
|
|
Total reportable segments
|
|
Removal of Great Park Venture (1)
|
|
Removal of Gateway Commercial Venture (1)
|
|
Add investment in Great Park Venture
|
|
Add investment in Gateway Commercial Venture
|
|
Other eliminations (2)
|
|
Corporate and unallocated (3)
|
|
Total Consolidated
|
Revenues
|
$
|
6,401
|
|
|
$
|
6,010
|
|
|
$
|
210,779
|
|
|
$
|
28,069
|
|
|
$
|
251,259
|
|
|
$
|
(175,689
|
)
|
|
$
|
(26,580
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48,990
|
|
Depreciation and amortization
|
271
|
|
|
287
|
|
|
12,456
|
|
|
11,730
|
|
|
24,744
|
|
|
—
|
|
|
(11,730
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
210
|
|
|
13,224
|
|
Interest income
|
1
|
|
|
—
|
|
|
2,815
|
|
|
—
|
|
|
2,816
|
|
|
(2,815
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,766
|
|
|
11,767
|
|
Interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
11,563
|
|
|
11,563
|
|
|
—
|
|
|
(11,563
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Segment profit (loss)/net profit (loss)
|
(6,802
|
)
|
|
(18,060
|
)
|
|
15,211
|
|
|
(187
|
)
|
|
(9,838
|
)
|
|
(3,068
|
)
|
|
1,676
|
|
|
(906
|
)
|
|
(1,257
|
)
|
|
—
|
|
|
(54,552
|
)
|
|
(67,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other significant items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
596,222
|
|
|
1,151,372
|
|
|
1,303,362
|
|
|
479,662
|
|
|
3,530,618
|
|
|
(1,154,216
|
)
|
|
(478,956
|
)
|
|
425,653
|
|
|
107,246
|
|
|
(730
|
)
|
|
494,277
|
|
|
2,923,892
|
|
Inventory assets and real estate related assets, net
|
559,126
|
|
|
1,136,958
|
|
|
1,059,717
|
|
|
464,123
|
|
|
3,219,924
|
|
|
(1,059,717
|
)
|
|
(464,123
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,696,084
|
|
Expenditures for long-lived assets (4)
|
198,008
|
|
|
73,177
|
|
|
109,292
|
|
|
27,030
|
|
|
407,507
|
|
|
(109,292
|
)
|
|
(27,030
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,354
|
|
|
273,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2017
|
|
(in thousands)
|
|
Valencia
|
|
San Francisco
|
|
Great Park
|
|
Commercial
|
|
Total reportable segments
|
|
Removal of Great Park Venture (1)
|
|
Removal of Gateway Commercial Venture (1)
|
|
Add investment in Great Park Venture
|
|
Add investment in Gateway Commercial Venture
|
|
Other eliminations (2)
|
|
Corporate and unallocated (3)
|
|
Total Consolidated
|
Revenues
|
$
|
31,568
|
|
|
$
|
91,187
|
|
|
$
|
497,173
|
|
|
$
|
9,682
|
|
|
$
|
629,610
|
|
|
$
|
(480,934
|
)
|
|
$
|
(9,245
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
139,431
|
|
Depreciation and amortization
|
553
|
|
|
316
|
|
|
—
|
|
|
4,504
|
|
|
5,373
|
|
|
—
|
|
|
(4,504
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
185
|
|
|
1,054
|
|
Interest income
|
3
|
|
|
—
|
|
|
2,226
|
|
|
—
|
|
|
2,229
|
|
|
(2,226
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,574
|
|
|
2,577
|
|
Interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
3,628
|
|
|
3,628
|
|
|
—
|
|
|
(3,628
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Segment profit (loss)/net profit (loss)
|
(12,358
|
)
|
|
(19,268
|
)
|
|
42,219
|
|
|
458
|
|
|
11,051
|
|
|
(36,061
|
)
|
|
(21
|
)
|
|
5,760
|
|
|
16
|
|
|
—
|
|
|
43,451
|
|
|
24,196
|
|
Other significant items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
444,407
|
|
|
1,123,266
|
|
|
1,578,142
|
|
|
456,292
|
|
|
3,602,107
|
|
|
(1,447,604
|
)
|
|
(456,006
|
)
|
|
423,492
|
|
|
106,516
|
|
|
(80,890
|
)
|
|
830,740
|
|
|
2,978,355
|
|
Inventory assets
|
361,943
|
|
|
1,063,949
|
|
|
1,089,513
|
|
|
448,795
|
|
|
2,964,200
|
|
|
(1,089,513
|
)
|
|
(448,795
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,425,892
|
|
Expenditures for long-lived assets (4)
|
84,024
|
|
|
62,188
|
|
|
311,932
|
|
|
446,072
|
|
|
904,216
|
|
|
(311,932
|
)
|
|
(446,072
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
146,213
|
|
(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 and income taxes. Corporate and unallocated assets consist of cash and cash equivalents, receivables, ROU assets, prepaid expenses and deferred equity and financing costs.
(4) Expenditures for long-lived inventory assets are net of cost reimbursements and include noncash project accruals and capitalized interest. For the year ended December 31, 2019, Great Park Venture’s expenditures include $127.0 million in inventory cost reimbursements.
A land banking entity represented one of the Company’s major customers during the year ended December 31, 2019 and accounted for approximately $139.9 million or 76%, respectively, of total consolidated revenues. The $139.9 million relates to revenues generated from homesites sold in Valencia. A related party of the Company has retained the option to acquire these homesites in the future from the land banking entity. Lennar and several of its affiliates represented one of the Company’s major customers for the year ended December 31, 2017 and accounted for approximately $93.4 million or 67%, respectively, of total consolidated revenues. These revenues represented land sales and management services revenues, and were reported in the Valencia and San Francisco segments. The Great Park Venture represented another of the Company’s major customers for the years ended December 31, 2019, 2018 and 2017, and accounted for approximately $36.9 million or 20%, $35.1 million or 72%, and $16.2 million or 12%, respectively, of total consolidated revenues. These revenues represented management services revenues and were reported in the Great Park segment.
16. SHARE-BASED COMPENSATION
In April 2019, the Company’s Board of Directors (the “Board”) approved the Five Point Holdings, LLC Amended and Restated 2016 Incentive Award Plan (the “Incentive Award Plan”), which amends and restates the
Five Point Holdings, LLC 2016 Incentive Award Plan (the “Prior Plan”) in its entirety. The plan became effective on June 6, 2019, the date the Five Point Holdings, LLC Amended and Restated 2016 Incentive Award Plan was approved by shareholders at the 2019 Annual Meeting of Shareholders.
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. Employees and consultants of the Company and its subsidiaries and affiliates, as well as non-employee members of the Board, are eligible to receive awards under the Incentive Awards Plan. The Incentive Award Plan increased the aggregate number of common shares available for issuance under the Prior Plan by 3,209,326 shares to a total authorized issuance of up to 11,710,148 Class A common shares of the Holding Company. As of December 31, 2019, there were 5,004,496 remaining Class A common shares available for future issuance under the Incentive Award Plan.
Under the Incentive Award Plan, the Company has granted restricted share units (“RSUs”) and restricted share awards either fully vested, with service conditions or with service and market performance conditions based on the market price of the Company’s Class A common shares. Awards with a service condition generally vest over a three-year period or in the case of non-employee directors over one year. Awards with a service and market performance condition generally vest at the end of a three-year period. Restricted share awards entitle the holders to non-forfeitable distributions and to vote the underlying Class A common share during the restricted period.
The Company estimates the fair value of restricted share awards with a service condition based on the closing market price of the Company’s Class A common shares on the award’s grant date. Prior to the Company’s IPO, the Company measured the fair value of RSUs and restricted share awards based on the estimated fair value of the Company’s underlying Class A common shares determined using a discounted cash flow analysis. The inputs utilized in the Company’s estimate were selected by the Company based on information available to the Company, including relevant information obtained after the measurement date, as to the assumptions that market participants would make at the measurement date. The grant date fair value of awards with a market condition are determined using a Monte-Carlo approach.
During the years ended December 31, 2019, 2018 and 2017, the Company reacquired vested RSUs and restricted share awards from employees for $4.1 million, $5.1 million and $6.5 million, respectively, for the purpose of settling tax withholding obligations. The reacquisition cost is based on the fair value of the Company’s Class A common shares on the date the tax obligation is incurred.
The following table summarizes share-based equity compensation activity for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
Share-Based Awards
(in thousands)
|
|
Weighted-
Average Grant
Date Fair Value
|
Nonvested at January 1, 2017
|
1,305
|
|
|
$
|
20.00
|
|
Granted
|
453
|
|
|
$
|
15.52
|
|
Vested
|
(673
|
)
|
|
$
|
19.26
|
|
Nonvested at December 31, 2017
|
1,085
|
|
|
$
|
18.57
|
|
Granted
|
1,724
|
|
|
$
|
14.81
|
|
Forfeited
|
(105
|
)
|
|
$
|
14.83
|
|
Vested
|
(811
|
)
|
|
$
|
18.76
|
|
Nonvested at December 31, 2018
|
1,893
|
|
|
$
|
15.27
|
|
Granted
|
1,899
|
|
|
$
|
5.09
|
|
Forfeited
|
(4
|
)
|
|
$
|
14.83
|
|
Vested
|
(777
|
)
|
|
$
|
14.62
|
|
Nonvested at December 31, 2019
|
3,011
|
|
|
$
|
9.02
|
|
Share-based compensation expense was $13.6 million, $11.4 million and $18.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. Share-based compensation expense is included in selling, general, and administrative expenses in the accompanying consolidated statements of operations. Approximately $14.2 million of total unrecognized compensation cost related to non-vested awards is expected to be recognized over a weighted–average period of 1.5 years from December 31, 2019. The estimated fair value at vesting of share-based awards that vested during the years ended December 31, 2019, 2018 and 2017 was $5.9 million, $11.8 million, and $10.5 million respectively.
In January 2020, the Company granted 0.7 million restricted share awards with a service condition to employees and non-employee directors.
17. EMPLOYEE BENEFIT PLANS
Retirement Plan—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. The Retirement Plan was frozen in 2004.
The Retirement Plan’s funded status and amounts recognized in the Company’s consolidated financial statements for the Retirement Plan as of and for the years ended December 31, 2019 and 2018 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Change in benefit obligation:
|
|
|
|
Projected benefit obligation—beginning of year
|
$
|
20,324
|
|
|
$
|
21,622
|
|
Interest cost
|
828
|
|
|
749
|
|
Benefits paid
|
(789
|
)
|
|
(984
|
)
|
Actuarial loss (gain)
|
1,654
|
|
|
(1,063
|
)
|
Projected benefit obligation—end of year
|
$
|
22,017
|
|
|
$
|
20,324
|
|
Change in plan assets:
|
|
|
|
|
|
Fair value of plan assets—beginning of year
|
$
|
16,895
|
|
|
$
|
18,829
|
|
Actual gain (loss) on plan assets
|
3,577
|
|
|
(1,168
|
)
|
Employer contributions
|
—
|
|
|
218
|
|
Benefits paid
|
(789
|
)
|
|
(984
|
)
|
Fair value of plan assets—end of year
|
$
|
19,683
|
|
|
$
|
16,895
|
|
Funded status
|
$
|
(2,334
|
)
|
|
$
|
(3,429
|
)
|
Amounts recognized in the consolidated balance sheet—liability
|
$
|
2,334
|
|
|
$
|
3,429
|
|
Amounts recognized in accumulated other comprehensive loss—net actuarial loss
|
$
|
(4,367
|
)
|
|
$
|
(5,428
|
)
|
The accumulated benefit obligation for the Retirement Plan was $22.0 million and $20.3 million at December 31, 2019 and 2018, respectively.
The components of net periodic benefit and other amounts recognized in accumulated other comprehensive loss for the years ended December 31, 2019, 2018 and 2017, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net periodic benefit:
|
|
|
|
|
|
Interest cost
|
$
|
828
|
|
|
$
|
749
|
|
|
$
|
818
|
|
Expected return on plan assets
|
(1,006
|
)
|
|
(1,146
|
)
|
|
(1,024
|
)
|
Amortization of net actuarial loss
|
143
|
|
|
90
|
|
|
113
|
|
Net periodic benefit
|
(35
|
)
|
|
(307
|
)
|
|
(93
|
)
|
Adjustment to accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
Net actuarial (gain) loss
|
(917
|
)
|
|
1,252
|
|
|
(611
|
)
|
Amortization of net actuarial loss
|
(143
|
)
|
|
(90
|
)
|
|
(113
|
)
|
Total adjustment to accumulated other comprehensive loss
|
(1,060
|
)
|
|
1,162
|
|
|
(724
|
)
|
Total recognized in net periodic benefit and accumulated other comprehensive loss
|
$
|
(1,095
|
)
|
|
$
|
855
|
|
|
$
|
(817
|
)
|
The weighted-average assumptions used to determine benefit obligations as of December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
2019
|
|
2018
|
Discount rate
|
3.15%
|
|
4.20%
|
Rate of compensation increase
|
N/A
|
|
N/A
|
The weighted-average assumptions used to determine net periodic expense for the years ended December 31, 2019, 2018 and 2017, were as follows:
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Discount rate
|
4.20%
|
|
3.55%
|
|
4.10%
|
Rate of compensation increase
|
N/A
|
|
N/A
|
|
N/A
|
Expected long-term return on plan assets
|
6.17%
|
|
6.23%
|
|
6.33%
|
To develop the long-term rate of return on assets assumption, the Company considered the current level of expected return on risk-free investments (primarily U.S. government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested, and the expectations for future returns of each asset class.
Plan Assets—The Company’s investment policy and strategy for the Retirement Plan is to ensure the appropriate level of diversification and risk. The asset allocation targets were approximately 55% in equity investments (Standard & Poor’s Large Cap Index Funds, Small Cap Equity, Mid Cap Equity, and International Equity) and approximately 45% in fixed-income investments (U.S. bond funds and domestic fixed income). In accordance with the policy, the Retirement Plan assets are monitored and the investments may be rebalanced quarterly. The Retirement Plan’s assets consist of pooled or collective investment funds that have more than one investor. The Retirement Plan estimates the fair value of its interest in such funds at a net asset value (“NAV”) per unit reported by the trustee. The NAV per unit is the result of accumulated values of the underlying investments held by the fund, which are valued daily. NAV is utilized by the Company as a practical expedient as of the consolidated balance sheet date. No adjustments were made to the NAV of the funds. The Retirement Plan’s assets may be redeemed at the NAV per unit with no restrictions.
The Retirement Plan’s assets at fair value as of December 31, 2019 and 2018, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Asset Category
|
2019
|
|
2018
|
Pooled and/or collective funds:
|
|
|
|
|
|
Equity funds:
|
|
|
|
Large cap
|
$
|
7,259
|
|
|
$
|
5,777
|
|
Mid cap
|
1,400
|
|
|
1,101
|
|
Small cap
|
1,963
|
|
|
1,579
|
|
International
|
1,960
|
|
|
1,654
|
|
Fixed-income funds—U.S. bonds and short term
|
7,101
|
|
|
6,784
|
|
Total
|
$
|
19,683
|
|
|
$
|
16,895
|
|
The Company’s funding policy is to contribute amounts sufficient to meet minimum requirements but not more than the maximum tax-deductible amount. The Company expects to contribute $0.6 million to the Retirement Plan in 2020 and expects future benefit payments to be paid as follows (in thousands):
|
|
|
|
|
2020
|
$
|
2,181
|
|
2021
|
1,011
|
|
2022
|
1,641
|
|
2023
|
1,474
|
|
2024
|
2,684
|
|
2025-2029
|
8,765
|
|
|
$
|
17,756
|
|
Employee Savings Plan—The Company has an employee savings plan under Section 401(k) of the Internal Revenue Code, which is available to all eligible associates. Certain associate contributions may be supplemented by the Company. The Company’s contributions were $0.7 million, $0.6 million and $0.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.
18. INCOME TAXES
The Company accounts for income taxes in accordance with ASC 740, 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 allocable share of the Operating Company’s income or gain.
The (expense) benefit for income taxes for the years ended December 31, 2019, 2018 and 2017 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Deferred income tax (expense) benefit:
|
|
|
|
|
|
Federal
|
$
|
(3,750
|
)
|
|
$
|
5,066
|
|
|
$
|
(28,643
|
)
|
State
|
(1,732
|
)
|
|
2,340
|
|
|
(6,501
|
)
|
Total deferred income tax (expense) benefit
|
(5,482
|
)
|
|
7,406
|
|
|
(35,144
|
)
|
Decrease (increase) in valuation allowance
|
3,062
|
|
|
(16,585
|
)
|
|
35,146
|
|
Expiration of unused loss carryforwards
|
(25
|
)
|
|
(4
|
)
|
|
(2
|
)
|
(Expense) benefit for income taxes
|
$
|
(2,445
|
)
|
|
$
|
(9,183
|
)
|
|
$
|
—
|
|
Limitations on the utilization of net operating losses included in the Tax Act caused the Holding Company to increase its valuation allowance giving rise to a $2.4 million and $9.2 million federal tax provision, respectively and no state income tax provision for the years ended December 31, 2019 and 2018. Due to the Holding Company generating federal and state tax losses, the Holding Company had no current federal or state income tax provision for the year ended December 31, 2017.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Deferred tax assets
|
|
|
|
Net operating loss carryforward
|
$
|
115,636
|
|
|
$
|
102,026
|
|
Tax receivable agreement
|
48,309
|
|
|
47,435
|
|
Other
|
1,258
|
|
|
1,382
|
|
Valuation allowance
|
(20,107
|
)
|
|
(23,207
|
)
|
Total deferred tax assets
|
145,096
|
|
|
127,636
|
|
Deferred tax liabilities-investments in subsidiaries
|
(156,724
|
)
|
|
(136,819
|
)
|
Deferred tax liability, net
|
$
|
(11,628
|
)
|
|
$
|
(9,183
|
)
|
A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required, if based on the available evidence; it is more likely than not that such assets will not be realized. In the continual assessment of the requirement for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency, and severity of current and cumulative losses; forecasts of future profitability; the duration of statutory carryforward periods; the Holding Company’s experience with loss carryforwards not expiring unused; and tax-planning alternatives. The amount of the valuation allowance recorded against the deferred tax asset could be adjusted if there are changes to the positive and negative factors discussed above.
During the year ended December 31, 2017, the valuation allowance decreased by $29.8 million and $5.3 million as a result of operating income and a decrease in deferred taxes attributable to federal tax rate reductions enacted as part of the Tax Act, respectively. Also during 2017, the valuation allowance increased by $27.3 million as a result of deferred taxes established through adjustments to contributed capital principally associated with increases in the payable pursuant to the tax receivable agreement. The net decrease in the valuation allowance for the year ended December 31, 2017 was $7.8 million. During the year ended December 31, 2018, the valuation allowance increased by $16.6 million as a result of operating losses. Also during 2018, the valuation allowance decreased by $1.3 million as a result of deferred taxes established through adjustments to contributed capital principally associated with increases in the payable pursuant to the tax receivable agreement. The net increase in the valuation
allowance for the year ended December 31, 2018 was $15.3 million. During the year ended December 31, 2019, the valuation allowance decreased by $3.1 million mainly due to operating income in the current year.
With the enactment of the Tax Act, the corporate federal income tax rate dropped from 35% to a flat 21% rate effective January 1, 2018. The SEC staff issued the Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act and provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
We applied the guidance in SAB 118 when accounting for the enactment-date effects of the Tax Act in 2017 and throughout 2018. As of December 31, 2017, we had 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 recorded a provisional adjustment to reduce its value by $5.3 million, which is included in the tax provision for 2017. Due to the Company’s valuation allowance, the $5.3 million was offset with a valuation allowance. As of December 31, 2018, we completed our accounting for all of the enactment-date income tax effects of the Tax Act. As part of our final analysis of the Tax Act, we recognized an adjustment of $9.2 million to the provisional amounts recorded at December 31, 2017 and included this adjustment as a component of income tax expense from continuing operations for the year ended December 31, 2018. The change related to adjustments to the Company’s valuation allowance as a result of the limitation for post-2017 net operating losses to offset only 80% of tax income. The change to the net operating loss utilization limitation requires additional valuation allowance to account for the limitation.
At December 31, 2019, the Holding Company had federal tax effected net operating loss (“NOL”) carryforwards totaling $88.6 million, and state tax effected NOL carryforwards, net of federal income tax benefit, totaling $27.0 million. Federal NOLs incurred prior to 2018 and California NOLs may be carried forward up to 20 years to offset future taxable income and begin to expire in 2029. Federal NOLs incurred in 2018 and forward do not expire.
The Internal Revenue Code generally limits the availability of NOLs if an ownership change occurs within any three-year period under Section 382. If the Holding Company were to experience an ownership change of more than 50%, the use of all NOLs (and potentially other built-in losses) would generally be subject to a limitation equal to the value of the Holding Company’s equity before the ownership change, multiplied by the long-term tax-exempt rate. The Holding Company estimates that after giving effect to various transactions by members who hold a 5% or greater interest in the Holding Company, it has not experienced an ownership change as computed in accordance with Section 382. In the event of an ownership change, the Holding Company’s use of the NOLs may be limited and not fully available for realization.
With regard to the TRA (see Note 11), the Holding Company has established a liability for the payments considered probable and estimable that would be required under the TRA based upon, among other things, the book value of its assets. This liability is not currently recognized for tax purposes and will give rise to tax deductions as payments are made. Accordingly, a deferred tax asset has been reflected for the net effect of this temporary difference.
A reconciliation of the statutory rate and the effective tax rate for 2019, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Statutory rate
|
21.00
|
%
|
|
21.00
|
%
|
|
35.00
|
%
|
State income taxes-net of federal income tax benefit
|
6.98
|
|
|
6.98
|
|
|
5.75
|
|
Statutory federal tax rate change
|
—
|
|
|
—
|
|
|
21.30
|
|
Noncontrolling interests
|
(14.98
|
)
|
|
(15.83
|
)
|
|
82.58
|
|
Executive compensation limitation and other permanent items
|
8.34
|
|
|
0.06
|
|
|
0.67
|
|
Valuation allowance related to the Tax Act
|
—
|
|
|
(15.63
|
)
|
|
—
|
|
Deferred tax asset valuation allowance
|
(11.54
|
)
|
|
(12.20
|
)
|
|
(145.31
|
)
|
Expiration of unused loss carryforwards
|
0.09
|
|
|
(0.01
|
)
|
|
0.01
|
|
Effective rate
|
9.89
|
%
|
|
(15.63
|
)%
|
|
—
|
%
|
At December 31, 2019 and 2018, the Holding Company did not have any gross unrecognized tax benefits, and did not require an accrual for interest or penalties.
For the year ended December 31, 2019, the Company recorded income tax expense of $2.4 million on a pre-tax income of $24.7 million. For the year ended December 31, 2018, the Company recorded tax expense of $9.2 million on a pre-tax loss of $58.8 million. For the year ended December 31, 2017, the Company recorded no benefit for income taxes (after application of a $35.1 million decrease in the Company’s valuation allowance). The effective tax rates for the years ended December 31, 2019, 2018 and 2017, differ from the 21% and 35% federal statutory 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 and from the change in the statutory federal tax rate in 2017.
The Holding Company files income tax returns in the U.S. federal jurisdiction and in the state of California. As a result of tax net operating losses incurred by the Holding Company for the years ended December 31, 2009 through December 31, 2017, the Holding Company is subject to U.S. federal, state, and local examinations by tax authorities for the years beginning 2009 through 2018. The Company is not currently under examination by any tax authority. The Company classifies any interest and penalties related to income taxes assessed by jurisdiction as part of income tax expense. The Company has concluded that there were no significant uncertain tax positions requiring recognition in its financial statements, nor has the Company been assessed interest or penalties by any major tax jurisdictions related to any open tax periods.
19. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS AND DISCLOSURES
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 December 31, 2019 and 2018.
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 December 31, 2019, the estimated fair value of notes payable, net was $631.1 million compared to a carrying value of $616.0 million. At December 31, 2018, the estimated fair value of notes payable, net was $550.1 million compared to a carrying value of $557.0 million. During the years ended December 31, 2019, 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. At December 31, 2018, the fair value of the contingent consideration was $64.9 million (level 3) and the contingent consideration was derecognized in the first quarter of 2019 (see Note 9).
20. EARNINGS PER SHARE
The Company uses the two-class method in its computation of earnings per share. Pursuant to the terms of the Five Point Holdings, LLC 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 of common shares share in the Company’s losses, and they share in the losses using the same mechanism as the distributions. The Company also has restricted share awards and performance restricted share awards (see Note 16) that have a right to non-forfeitable dividends while unvested and are contemplated as participating when the Company is in a net income position. These awards participate in distributions on a basis equivalent to other Class A common shares but do not participate in losses.
For the years ended December 31, 2019, 2018 and 2017, the Company operated in a net income, net loss, and net income position, respectively. No distributions were declared for either periods, as such, net incomes and losses attributable to the parent were allocated to the Class A common shares and Class B common shares at an amount per Class B common share equal to 0.03% multiplied by the amount per Class A common share. Basic income or loss per Class A common share is determined by dividing net income or loss allocated to Class A Common shareholders by the weighted average number of Class A common shares outstanding for the period. Basic income or loss per Class B common share is determined by dividing net income or loss allocated to the Class B common shares by the weighted average number of Class B common shares outstanding during the period.
Diluted income or 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. The Company uses the treasury stock method or the two-class method when evaluating dilution for RSUs, restricted shares, and performance restricted shares. The more dilutive of the two methods is included in the calculation for diluted income or loss per share.
The following table summarizes the basic and diluted earnings per share calculations for the years ended December 31, 2019, 2018 and 2017 (in thousands, except shares and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
|
|
Net income (loss) attributable to the Company
|
$
|
9,033
|
|
|
$
|
(34,714
|
)
|
|
$
|
73,235
|
|
Adjustments to net income (loss) attributable to the Company
|
50
|
|
|
221
|
|
|
(750
|
)
|
Net income (loss) attributable to common shareholders
|
$
|
9,083
|
|
|
$
|
(34,493
|
)
|
|
$
|
72,485
|
|
Numerator—basic common shares:
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
$
|
9,083
|
|
|
$
|
(34,493
|
)
|
|
$
|
72,485
|
|
Less: net income allocated to participating securities
|
$
|
(390
|
)
|
|
$
|
—
|
|
|
$
|
(506
|
)
|
Allocation of net income (loss) among common shareholders
|
$
|
8,693
|
|
|
$
|
(34,493
|
)
|
|
$
|
71,979
|
|
Numerator for basic net income (loss) available to Class A Common Shareholders
|
$
|
8,690
|
|
|
$
|
(34,480
|
)
|
|
$
|
71,947
|
|
Numerator for basic net income (loss) available to Class B Common Shareholders
|
$
|
3
|
|
|
$
|
(13
|
)
|
|
$
|
32
|
|
Numerator—diluted common shares:
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
$
|
9,083
|
|
|
$
|
(34,493
|
)
|
|
$
|
72,485
|
|
Reallocation of income (loss) to Company upon assumed exchange of common units
|
$
|
9,501
|
|
|
$
|
—
|
|
|
$
|
(48,289
|
)
|
Less: net income allocated to participating securities
|
$
|
(372
|
)
|
|
$
|
—
|
|
|
$
|
(69
|
)
|
Allocation of net income (loss) among common shareholders
|
$
|
18,212
|
|
|
$
|
(34,493
|
)
|
|
$
|
24,127
|
|
Numerator for diluted net income (loss) available to Class A Common Shareholders
|
$
|
18,209
|
|
|
$
|
(34,480
|
)
|
|
$
|
24,123
|
|
Numerator for diluted net income (loss) available to Class B Common Shareholders
|
$
|
3
|
|
|
$
|
(13
|
)
|
|
$
|
4
|
|
Denominator:
|
|
|
|
|
|
Basic weighted average Class A common shares outstanding
|
66,261,968
|
|
|
65,002,387
|
|
|
54,006,954
|
|
Diluted weighted average Class A common shares outstanding
|
145,491,898
|
|
|
65,002,387
|
|
|
133,007,828
|
|
Basic and diluted weighted average Class B common shares outstanding
|
79,221,176
|
|
|
79,859,730
|
|
|
78,821,553
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
Class A common shares
|
$
|
0.13
|
|
|
$
|
(0.53
|
)
|
|
$
|
1.33
|
|
Class B common shares
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
Class A common shares
|
$
|
0.13
|
|
|
$
|
(0.53
|
)
|
|
$
|
0.18
|
|
Class B common shares
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
Anti-dilutive potential RSUs
|
—
|
|
|
72,579
|
|
|
—
|
|
Anti-dilutive potential Performance RSUs
|
388,155
|
|
|
—
|
|
|
—
|
|
Anti-dilutive potential Restricted Shares (weighted average)
|
—
|
|
|
1,817,020
|
|
|
—
|
|
Anti-dilutive potential Class A common shares (weighted average)
|
—
|
|
|
79,883,687
|
|
|
—
|
|
In January 2020, the Company granted 0.7 million restricted shares to employees and non-employee directors (see Note 16).
21. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss attributable to the Company consists of unamortized defined benefit pension plan net actuarial losses that totaled $2.7 million and $3.4 million at December 31, 2019 and 2018, net of tax benefits of $0.8 million and $0.9 million, respectively. At December 31, 2019 and 2018, the Company held a full valuation allowance related to the accumulated tax benefits, respectively. Accumulated other comprehensive loss of $1.6 million and $2.1 million is included in noncontrolling interests at December 31, 2019 and 2018, 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 $89,000, $55,000 and $64,000, net of taxes, and are included in selling, general, and administrative expenses on the accompanying consolidated statements of operations for the years ended December 31, 2019, 2018 and 2017, respectively.
22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Quarterly Periods
|
|
(in thousands, except per share amounts)
|
|
First (1)
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
13,073
|
|
|
$
|
12,387
|
|
|
$
|
12,014
|
|
|
$
|
146,906
|
|
Income (loss) before income tax
|
53,999
|
|
|
(22,628
|
)
|
|
(22,955
|
)
|
|
16,297
|
|
Net income (loss) attributable to the Company
|
23,808
|
|
|
(10,512
|
)
|
|
(10,663
|
)
|
|
6,400
|
|
Net income (loss) attributable to the Company per Class A Share (Basic and diluted)
|
0.35
|
|
|
(0.16
|
)
|
|
(0.16
|
)
|
|
0.09
|
|
Net income (loss) attributable to the Company per Class B Share (Basic and diluted)
|
0.00
|
|
|
(0.00
|
)
|
|
(0.00
|
)
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
2018 Quarterly Periods
|
|
(in thousands, except per share amounts)
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
14,967
|
|
|
$
|
13,090
|
|
|
$
|
12,988
|
|
|
$
|
7,945
|
|
Loss before income tax
|
(14,297
|
)
|
|
(11,303
|
)
|
|
(21,939
|
)
|
|
(11,223
|
)
|
Net loss attributable to the Company
|
(5,232
|
)
|
|
(5,160
|
)
|
|
(10,019
|
)
|
|
(14,303
|
)
|
Net loss attributable to the Company per Class A Share (Basic)
|
(0.08
|
)
|
|
(0.08
|
)
|
|
(0.15
|
)
|
|
(0.22
|
)
|
Net loss attributable to the Company per Class A Share (Diluted)
|
(0.10
|
)
|
|
(0.08
|
)
|
|
(0.15
|
)
|
|
(0.22
|
)
|
Net loss attributable to the Company per Class B Share (Basic and diluted)
|
(0.00
|
)
|
|
(0.00
|
)
|
|
(0.00
|
)
|
|
(0.00
|
)
|
(1) Included in the quarterly financial results for the first quarter of 2019 is gain on settlement of contingent consideration—related party of $64.9 million related to the termination of the Retail Project and the San Francisco Venture being released from certain development obligations (see Note 9).