NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BUSINESS AND ORGANIZATION
Five Point Holdings, LLC, a Delaware limited liability company (the “Holding Company” and, together with its consolidated subsidiaries, the “Company”), is an owner and developer of mixed-use, master-planned communities in California. The Holding Company owns all of its assets and conducts all of its operations through Five Point Operating Company, LP, a Delaware limited partnership (the “Operating Company”), and its subsidiaries.
The Company has two classes of shares outstanding: Class A common shares and Class B common shares. Holders of Class A common shares and holders of Class B common shares are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders, and are both entitled to receive distributions at the same time. However, the distributions paid to holders of our Class B common shares are in an amount per share equal to 0.0003 multiplied by the amount paid per Class A common share.
The diagram below presents a simplified depiction of the Company’s current organizational structure as of June 30, 2020:
(1) A wholly owned subsidiary of the Holding Company serves as the sole managing general partner of the Operating Company. As of June 30, 2020, the Company owned approximately 62.5% of the outstanding Class A Common Units of the Operating Company. After a one year holding period, a holder of Class A Common Units of the Operating Company can exchange the units for, at the Company’s option, either Class A common shares of the Holding Company, on a one-for-one basis, or cash equal to the fair market value of such shares. Assuming the exchange of all outstanding Class A Common Units of the Operating Company and all outstanding Class A units of The Shipyard Communities, LLC, a Delaware limited liability company (the “San Francisco Venture”) (see (2) below), that are not held by the Company, based on the closing price of the Company’s Class A common shares on July 31, 2020 ($4.80), the equity market capitalization of the Company was approximately $711.9 million.
(2) The Operating Company owns all of the outstanding Class B units of the San Francisco Venture, the entity developing the Candlestick and The San Francisco Shipyard communities. The Class A units of the San Francisco Venture, which the Operating Company does not own, are intended to be economically equivalent to Class A Common Units of the Operating Company. As the holder of all outstanding Class B units of the San Francisco Venture, the Operating Company is entitled to receive 99% of available cash from the San Francisco Venture after the holders of Class A units in the San Francisco Venture have received distributions equivalent to the distributions, if any, paid on Class A Common Units of the Operating Company. Class A units of the San Francisco Venture can be exchanged, on a one-for-one basis, for Class A Common Units of the Operating Company (See Note 5).
(3) Together, the Operating Company, Five Point Communities, LP, a Delaware limited partnership (“FP LP”), and Five Point Communities Management, Inc., a Delaware corporation (“FP Inc.” and together with FP LP, the “Management Company”) own 100% of Five Point Land, LLC, a Delaware limited liability company (“FPL”), the entity developing Valencia (formerly known as Newhall Ranch), a master-planned community located in northern Los Angeles County, California. The Operating Company has a controlling interest in the Management Company.
(4) Interests in Heritage Fields LLC, a Delaware limited liability company (the “Great Park Venture”), are either “Percentage Interests” or “Legacy Interests.” Holders of the Legacy Interests are entitled to receive priority distributions in an amount up to $565.0 million, of which $431.3 million had been distributed as of July 31, 2020 (See Note 4). The Company owns a 37.5% Percentage Interest in the Great Park Venture and serves as its administrative member. However, management of the Great Park Venture is vested in the four voting members, who have a total of five votes. Major decisions generally require the approval of at least 75% of the votes of the voting members. The Company has two votes, and the other three voting members each have one vote, so the Company is unable to approve any major decision without the consent or approval of at least two of the other voting members. The Company does not include the Great Park Venture as a consolidated subsidiary, but rather as an equity method investee, in its consolidated financial statements.
(5) The Company owns a 75% interest in Five Point Office Venture Holdings I, LLC, a Delaware limited liability company (the “Gateway Commercial Venture”). The Five Point Gateway Campus consists of four buildings totaling approximately 1 million square feet of office, medical and research and development space on 73 acres. The Gateway Commercial Venture owns three of the four buildings and approximately 62 acres of commercial land at the campus. The Company manages the Gateway Commercial Venture, however, the manager’s authority is limited. Major decisions by the Gateway Commercial Venture generally require unanimous approval by an executive committee composed of two people designated by the Company and two people designated by another investor. Some decisions require approval by all of the members of the Gateway Commercial Venture. The Company does not include the Gateway Commercial Venture as a consolidated subsidiary, but rather as an equity method investee, in its consolidated financial statements.
2. BASIS OF PRESENTATION
Principles of consolidation—The accompanying condensed consolidated financial statements include the accounts of the Holding Company and the accounts of all subsidiaries in which the Holding Company has a controlling interest and the consolidated accounts of variable interest entities (“VIEs”) in which the Holding Company is deemed to be the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.
Unaudited interim financial information—The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. In the opinion of management, all adjustments (including normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the full year.
Use of estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Management evaluates its estimates on an ongoing basis and makes revisions to these estimates and related disclosures as experience develops or new information becomes known. Actual results could differ from those estimates.
The efforts that have been implemented at the national, state and local levels to combat and mitigate a rapid spread of a global coronavirus (COVID-19) pandemic have severely impacted daily activities and the economies of California and the United States. The Company is continuing to limit development activities at the Company’s communities. While the Company is closely monitoring government guidelines and developments in the response to the COVID-19 outbreak, the extent to which COVID-19 impacts the Company’s results will depend on future developments, including the extent and duration of precautionary measures to slow the outbreak and impacts on employment and other economic conditions affecting the Company’s business. Due to the uncertainties associated with COVID-19, the Company’s estimates of the impacts to its future results of operations, financial condition or cash flows may materially change.
Miscellaneous other income—Miscellaneous other income consisted of the following (in thousands):
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Three Months Ended June 30,
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Six Months Ended June 30,
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|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net periodic pension benefit
|
$
|
88
|
|
|
$
|
9
|
|
|
$
|
176
|
|
|
$
|
19
|
|
|
Total miscellaneous other income
|
$
|
88
|
|
|
$
|
9
|
|
|
$
|
176
|
|
|
$
|
19
|
|
Recently adopted accounting pronouncements—In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”) which amends the guidance on the impairment of financial instruments, including most debt instruments, trade receivables, contract assets, and loans. ASU No. 2016-13 adds to U.S. GAAP an impairment model known as the current expected credit loss model, or CECL, that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses for instruments measured at amortized cost, resulting in a net presentation of the amount expected to be collected on the financial asset. The Company and its unconsolidated entities adopted ASU No. 2016-13 on January 1, 2020 using a modified retrospective approach with no material impact on the Company’s consolidated financial statements.
Under the new guidance, the Company performs a credit loss assessment for new financial assets obtained on a pooling basis by financial asset type (i.e. contract assets, trade receivables, investments, etc.) and estimates an allowance of expected credit loss. Factors considered in the estimation of expected credit loss include, but are not limited to, historical loss experience, third-party default rates on similar financial assets, credit-rating agency ratings and qualitative macroeconomic conditions. The Company continually monitors its credit loss exposure by evaluating changes in economic conditions or significant events and how that may impact current credit loss estimates. At June 30, 2020, there was no material allowance for credit loss.
3. REVENUES
The following tables present the Company’s consolidated revenues disaggregated by revenue source and reporting segment (see Note 14) (in thousands):
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Three Months Ended June 30, 2020
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Six Months Ended June 30, 2020
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Valencia
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San Francisco
|
|
Great Park
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Commercial
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Total
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Valencia
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|
San Francisco
|
|
Great Park
|
|
Commercial
|
|
Total
|
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Land sales
|
$
|
17,030
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,030
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|
|
$
|
17,046
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|
|
$
|
—
|
|
|
$
|
—
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|
|
$
|
—
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|
|
$
|
17,046
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|
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Management services
|
—
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|
|
40
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|
|
6,177
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|
|
97
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|
|
6,314
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|
|
—
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|
|
835
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|
|
13,529
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|
|
194
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|
|
14,558
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Operating properties
|
538
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|
|
132
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|
|
—
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|
|
—
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|
|
670
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|
|
1,031
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|
|
312
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|
|
—
|
|
|
—
|
|
|
1,343
|
|
|
|
17,568
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|
|
172
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|
|
6,177
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|
|
97
|
|
|
24,014
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|
|
18,077
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|
|
1,147
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|
|
13,529
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|
|
194
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|
|
32,947
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|
|
Operating properties leasing revenues
|
293
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|
|
—
|
|
|
—
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|
|
—
|
|
|
293
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|
|
580
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|
|
—
|
|
|
—
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|
|
—
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|
|
580
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|
|
|
$
|
17,861
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|
|
$
|
172
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|
|
$
|
6,177
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|
|
$
|
97
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|
|
$
|
24,307
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|
|
$
|
18,657
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|
|
$
|
1,147
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|
|
$
|
13,529
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|
|
$
|
194
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|
|
$
|
33,527
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|
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Three Months Ended June 30, 2019
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|
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|
|
|
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Six Months Ended June 30, 2019
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|
|
|
|
|
|
|
|
|
|
Valencia
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|
San Francisco
|
|
Great Park
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Commercial
|
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Total
|
|
Valencia
|
|
San Francisco
|
|
Great Park
|
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Commercial
|
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Total
|
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Land sales
|
$
|
24
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|
|
$
|
222
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
246
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|
|
$
|
88
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|
|
$
|
443
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|
|
$
|
—
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|
|
$
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—
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|
|
$
|
531
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|
|
Management services
|
—
|
|
|
573
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|
|
10,437
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|
|
158
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|
|
11,168
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|
|
—
|
|
|
1,271
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|
|
20,833
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|
|
127
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|
|
22,231
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|
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Operating properties
|
455
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|
|
177
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|
|
—
|
|
|
—
|
|
|
632
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|
|
1,708
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|
|
351
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|
|
—
|
|
|
—
|
|
|
2,059
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|
|
|
479
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|
|
972
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|
|
10,437
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|
|
158
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|
|
12,046
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|
|
1,796
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|
|
2,065
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|
|
20,833
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|
|
127
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|
|
24,821
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|
|
Operating properties leasing revenues
|
341
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|
|
—
|
|
|
—
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|
|
—
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|
|
341
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|
|
639
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|
|
—
|
|
|
—
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|
|
—
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|
|
639
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|
|
|
$
|
820
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|
|
$
|
972
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|
|
$
|
10,437
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|
|
$
|
158
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|
|
$
|
12,387
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|
|
$
|
2,435
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|
|
$
|
2,065
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|
|
$
|
20,833
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|
|
$
|
127
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|
|
$
|
25,460
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|
The opening and closing balances of the Company’s contract assets for the six months ended June 30, 2020 were $73.0 million ($68.1 million related party, see Note 8) and $78.9 million ($72.8 million related party, see Note 8), respectively. The opening and closing balances of the Company’s contract assets for the six months ended June 30, 2019 were $50.6 million ($49.8 million related party) and $63.4 million ($61.5 million related party), respectively. The increase of $5.9 million and $12.8 million for the six months ended June 30, 2020 and 2019, respectively, between the opening and closing balances of the Company’s contract assets primarily result from a timing difference between the Company’s recognition of revenue earned for the performance of management services and no contractual payments due from the customer during the period.
During the three and six months ended June 30, 2020, land sales revenue included $14.9 million that was recognized as a receivable upon completion of the performance obligation. The receivable is in the form of a promissory note that was substantially paid in July 2020 with the balance due in December 2020. The opening and closing balances of the Company’s other receivables from contracts with customers and contract liabilities for the six months ended June 30, 2020 and 2019 were insignificant.
The Company, through the Management Company, has a development management agreement, as amended and restated (“A&R DMA”), with the Great Park Venture. The A&R DMA has an original term commencing on December 29, 2010 and ending on December 31, 2021, with options to renew upon mutual agreement for three additional years and then two additional years. Consideration in the form of contingent incentive compensation from the A&R DMA is recognized as revenue and a contract asset as services are provided over the expected contract term, with contractual payments payable in connection with, and as a percentage of, distributions made to the members of the Great Park Venture. As of June 30, 2020, the aggregate amount of the estimated transaction price allocated to the Company’s partially unsatisfied performance obligations associated with the A&R DMA was $21.8 million. Subject to changes in the estimated transaction price and constraints on the transaction price, the Company will recognize this revenue ratably as services are provided over the remaining expected contract term.
4. INVESTMENT IN UNCONSOLIDATED ENTITIES
Great Park Venture
The Great Park Venture has two classes of interests—“Percentage Interests” and “Legacy Interests.” Legacy Interest holders are entitled to receive priority distributions in an aggregate amount equal to $476.0 million and up to an additional $89.0 million from subsequent distributions of cash depending on the performance of the Great Park Venture. The holders of the Percentage Interests will receive all other distributions. The Operating Company owns 37.5% of the Great Park Venture’s Percentage Interests as of June 30, 2020. The Great Park Venture has made distributions to the holders of Legacy Interests in the aggregate amount of $431.3 million as of June 30, 2020.
The Great Park Venture is the owner of Great Park Neighborhoods, a mixed-use, master-planned community located in Orange County, California. The Company, through the Management Company, manages the planning, development and sale of land at the Great Park Neighborhoods and supervises the day-to-day affairs of the Great Park Venture. The Great Park Venture is managed by an executive committee of representatives appointed by only the holders of Percentage Interests. The Company does not control the actions of the executive committee.
At each reporting period, and when events and circumstances dictate, the Company evaluates its equity method investment in the Great Park Venture for impairment. This evaluation focuses on the recoverability of the carrying value based upon the discounted value of distributions the Company expects to receive from the Great Park Venture. This evaluation is performed at the investment level and is separate and apart from impairment evaluations on long-lived assets, such as the Company’s consolidated inventory balances, that focus on recoverability with undiscounted cash flows. The Company evaluates the investment as a whole and does not evaluate the underlying assets of the Great Park Venture for impairment. If the Great Park Venture records an impairment charge against its assets, the Company will recognize its share of the loss, adjusted for basis differences. During the six months ended June 30, 2020 and 2019, the Great Park Venture did not recognize any impairment losses on its long-lived assets.
In March 2020, the Company determined that an other-than-temporary impairment existed for the Company’s investment in the Great Park Venture as the estimated fair value of the investment was less than the carrying value. This was the result of a delay in the projected distributions from Great Park Venture to the Company. In determining that the impairment was other-than-temporary, the Company concluded at the measurement date that it was uncertain if a near term recovery of value that was lost as a result of delays to expected land sales from the impacts of the COVID-19 pandemic would occur. As a result, the Company recognized a $26.9 million impairment charge that is included in equity in loss from unconsolidated entities on the condensed consolidated statement of operations during the six months ended June 30, 2020.
Below are the most significant unobservable inputs used in the Company’s discounted cash flow model to determine the estimated fair value (level 3) of the Company’s investment in the Great Park Venture at the time the other-than-temporary impairment was recognized:
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Unobservable inputs
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Range
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Annual home price appreciation
|
|
0% - 7%
|
|
Annual horizontal development cost appreciation
|
|
0% - 3%
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|
Average annual absorption of homesites (market rate homesites)
|
|
900
|
|
2020 home price range
|
|
$640,000 - $1,300,000
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|
Unlevered discount rate
|
|
9%
|
The cost of the Company’s investment in the Great Park Venture, adjusted for impairments, is higher than the Company’s underlying equity in the carrying value of net assets of the Great Park Venture (basis difference). The Company’s earnings from the equity method investment are adjusted by amortization and accretion of the basis differences as the assets (mainly inventory) and liabilities that gave rise to the basis difference are sold, settled or amortized.
During the six months ended June 30, 2020, the Great Park Venture recognized $1.0 million in land sale revenues to related parties of the Company and $21.8 million in land sale revenues to third parties. During the six months ended June 30, 2019, the Great Park Venture recognized $130.0 million in land sale revenues to a related party of the Company and $62.6 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 retained the option to acquire these homesites in the future from the land bank entity. The following table summarizes the statements of operations of the Great Park Venture for the six months ended June 30, 2020 and 2019 and reconciles the Company’s share to the amount recognized as equity in (loss) earnings (in thousands):
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|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
Land sale revenues
|
$
|
22,826
|
|
|
$
|
192,579
|
|
|
Cost of land sales
|
(15,304)
|
|
|
(128,968)
|
|
|
Other costs and expenses
|
(23,799)
|
|
|
(32,036)
|
|
|
Net (loss) income of Great Park Venture
|
$
|
(16,277)
|
|
|
$
|
31,575
|
|
|
The Company’s share of net (loss) income
|
$
|
(6,104)
|
|
|
$
|
11,841
|
|
|
Basis difference amortization
|
(1,497)
|
|
|
(3,893)
|
|
|
Other-than-temporary investment impairment
|
(26,851)
|
|
|
—
|
|
|
Equity in (loss) earnings from Great Park Venture
|
$
|
(34,452)
|
|
|
$
|
7,948
|
|
The following table summarizes the balance sheet data of the Great Park Venture and the Company’s investment balance as of June 30, 2020 and December 31, 2019 (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Inventories
|
$
|
895,536
|
|
|
$
|
870,861
|
|
|
Cash and cash equivalents
|
169,512
|
|
|
293,002
|
|
|
Receivable and other assets
|
27,247
|
|
|
32,395
|
|
|
Total assets
|
$
|
1,092,295
|
|
|
$
|
1,196,258
|
|
|
Accounts payable and other liabilities
|
$
|
149,669
|
|
|
$
|
159,965
|
|
|
Distribution payable to Legacy Interests
|
—
|
|
|
76,272
|
|
|
Redeemable Legacy Interests
|
133,695
|
|
|
133,695
|
|
|
Capital (Percentage Interest)
|
808,931
|
|
|
826,326
|
|
|
Total liabilities and capital
|
$
|
1,092,295
|
|
|
$
|
1,196,258
|
|
|
The Company’s share of capital in Great Park Venture
|
$
|
303,349
|
|
|
$
|
309,872
|
|
|
Unamortized basis difference
|
93,615
|
|
|
121,963
|
|
|
The Company’s investment in the Great Park Venture
|
$
|
396,964
|
|
|
$
|
431,835
|
|
Gateway Commercial Venture
The Company owns a 75% interest in the Gateway Commercial Venture as of June 30, 2020. The Gateway Commercial Venture is governed by an executive committee in which the Company is entitled to appoint two individuals. One of the other members of the Gateway Commercial Venture is also entitled to appoint two individuals to the executive committee. The unanimous approval of the executive committee is required for certain matters, which limits the Company’s ability to control the Gateway Commercial Venture. However, the Company is able to exercise significant influence and therefore accounts for its investment in the Gateway Commercial Venture using the equity method. The Company is the manager of the Gateway Commercial Venture, with responsibility to manage and administer its day-to-day affairs and implement a business plan approved by the executive committee.
The Gateway Commercial Venture acquired its interest in 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 Gateway Commercial Venture closed on the sale of approximately 11 acres of land and an approximately 189,000 square foot building to City of Hope in May 2020 for a purchase price of $108.0 million. The sale of this land and building, which had a carrying value of approximately $67.5 million, resulted in a gain of approximately $37.4 million, net of transaction costs. Concurrently, the Gateway Commercial Venture made a debt payment of $30.0 million to its lender and a distribution of approximately $56.3 million to the Company with net proceeds generated from the sale. Cumulative distributions from unconsolidated entities are treated as returns on investment to the extent of the Company's share of cumulative earnings from the investment and included in the Company's consolidated statements of cash flows as cash flow from operating activities. Cumulative distributions in excess of the Company's share of cumulative earnings are treated as returns of investment and included in the Company's consolidated statements of cash flows as cash flows from investing activities.
On June 26, 2020, the Gateway Commercial Venture entered into a purchase and sale agreement for the sale of two buildings at the Five Point Gateway Campus, comprising a total of approximately 660,000 square feet of research and development space currently leased to one tenant, a subsidiary of Broadcom Inc., under a triple net lease. The purchase price is $355.0 million and the purchaser is a real estate investment management company and operator. The sale is anticipated to close in August 2020.
The Company and a related party of the Company separately lease office space at the Five Point Gateway Campus, and during the six months ended June 30, 2020 and 2019, the Gateway Commercial Venture recognized $4.1 million and $4.0 million, respectively, in rental revenues from those leasing arrangements.
The following table summarizes the statements of operations of the Gateway Commercial Venture for the six months ended June 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
Rental revenues
|
$
|
16,982
|
|
|
$
|
17,134
|
|
|
Rental operating and other expenses
|
(3,427)
|
|
|
(3,217)
|
|
|
Depreciation and amortization
|
(7,432)
|
|
|
(7,542)
|
|
|
Gain on asset sale, net
|
37,413
|
|
|
—
|
|
|
Interest expense
|
(6,942)
|
|
|
(8,689)
|
|
|
Net income (loss) of Gateway Commercial Venture
|
$
|
36,594
|
|
|
$
|
(2,314)
|
|
|
Equity in earnings (loss) from Gateway Commercial Venture
|
$
|
27,446
|
|
|
$
|
(1,735)
|
|
The following table summarizes the balance sheet data of the Gateway Commercial Venture and the Company’s investment balance as of June 30, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Real estate and related intangible assets, net
|
$
|
377,951
|
|
|
$
|
451,988
|
|
|
Other assets
|
27,308
|
|
|
21,410
|
|
|
Total assets
|
$
|
405,259
|
|
|
$
|
473,398
|
|
|
Notes payable, net
|
$
|
273,845
|
|
|
$
|
302,344
|
|
|
Other liabilities
|
34,614
|
|
|
35,848
|
|
|
Members’ capital
|
96,800
|
|
|
135,206
|
|
|
Total liabilities and capital
|
$
|
405,259
|
|
|
$
|
473,398
|
|
|
The Company’s investment in the Gateway Commercial Venture
|
$
|
72,600
|
|
|
$
|
101,404
|
|
5. NONCONTROLLING INTERESTS
The Holding Company’s wholly owned subsidiary is the managing general partner of the Operating Company. At June 30, 2020, the Holding Company and its wholly owned subsidiary owned approximately 62.5% of the outstanding Class A Common Units and 100% of the outstanding Class B Common Units of the Operating Company. The Holding Company consolidates the financial results of the Operating Company and its subsidiaries and records a noncontrolling interest for the remaining 37.5% of the outstanding Class A Common Units of the Operating Company.
After a 12 month holding period, holders of Class A Common Units of the Operating Company may exchange their units for, at the Company’s option, either (i) Class A common shares on a one-for-one basis (subject to adjustment in the event of share splits, distributions of shares, warrants or share rights, specified extraordinary distributions and similar events), or (ii) cash in an amount equal to the market value of such shares at the time of exchange. Whether such units are acquired by the Company in exchange for Class A common shares or for cash, if the holder also owns Class B common shares, then an equal number of that holder’s Class B common shares will automatically convert into Class A common shares, at a ratio of 0.0003 Class A common shares for each Class B common share. This exchange right is currently exercisable by all holders of outstanding Class A Common Units of the Operating Company.
The terms of the Operating Company's Limited Partnership Agreement (“LPA”) provide for the payment of certain tax distributions to the Operating Company's partners and management partner in an amount equal to the estimated income tax liabilities resulting from taxable income or gain allocated to those parties. The tax distribution provisions in the LPA were included in the Operating Company's governing documents adopted prior to our initial public offering and were designed to provide funds necessary to pay tax liabilities for income that might be allocated, but not paid, to the partners and the management partner. The management partner is an entity controlled by the Company’s Chairman and Chief Executive Officer, Emile Haddad. Consequently, in accordance with the terms of the LPA, a tax distribution payment of $4.6 million was paid to the management partner in January 2020 as a result of taxable income allocated to it in 2018 and estimated to be allocated to it in 2019. The tax distribution made is treated as an advance distribution under the LPA and will be taken into account when determining the amounts otherwise distributable to the management partner under the LPA.
The San Francisco Venture has three classes of units—Class A, Class B and Class C units. The Operating Company owns all of the outstanding Class B units of the San Francisco Venture. All of the outstanding Class A units are owned by affiliates of Lennar Corporation (“Lennar”) and affiliates of Castlelake, LP (“Castlelake”). The Class A units of the San Francisco Venture are intended to be substantially economically equivalent to the Class A Common Units of the Operating Company. The Class A units of the San Francisco Venture represent noncontrolling interests to the Operating Company.
Holders of Class A units of the San Francisco Venture can redeem their units at any time and receive Class A Common Units of the Operating Company on a one-for-one basis (subject to adjustment in the event of share splits, distributions of shares, warrants or share rights, specified extraordinary distributions and similar events). If a holder requests a redemption of Class A units of the San Francisco Venture that would result in the Holding Company’s ownership of the Operating Company falling below 50.1%, the Holding Company has the option of satisfying the redemption with Class A common shares instead. The Company also has the option, at any time, to acquire outstanding Class A units of the San Francisco Venture in exchange for Class A Common Units of the Operating Company. The 12 month holding period for any Class A Common Units of the Operating Company issued in exchange for Class A units of the San Francisco Venture is calculated by including the period that such Class A units of the San Francisco Venture were owned. This exchange right is currently exercisable by all holders of outstanding Class A units of the San Francisco Venture.
In 2019, the San Francisco Venture issued 25.0 million new Class C units to an affiliate of Lennar in exchange for a contribution of $25.0 million to the San Francisco Venture. Provided that Lennar completes the construction of a certain number of new homes in Candlestick as contemplated under purchase and sale agreements with the Company, the San Francisco Venture is required to redeem the Class C units if and when the Company receives reimbursements from the Mello-Roos communities facilities district formed for the development, in an aggregate amount equal to 50% of any reimbursements up to a maximum amount of $25.0 million. The San Francisco Venture also maintains the ability to redeem the then outstanding balance of Class C units for cash at any time. Upon a liquidation of the San Francisco Venture, the holders of Class C Units are entitled to a liquidation preference in an aggregate amount equal to 50% of the cumulative amount of reimbursements received, less the aggregate amount previously paid to redeem Class C units. The maximum amount payable by the San Francisco Venture pursuant to redemptions or liquidation of the Class C units is $25.0 million. The holders of Class C units are not entitled to receive any other forms of distributions and are not entitled to any voting rights. In connection with the issuance of the Class C units, the San Francisco Venture agreed to spend $25.0 million on the development of infrastructure and/or parking facilities at the Company’s Candlestick development. At June 30, 2020, $25.0 million of Class C units are outstanding and included in redeemable noncontrolling interest on the condensed consolidated balance sheet.
Net (loss) income attributable to the noncontrolling interests on the condensed consolidated statements of operations represents the portion of earnings attributable to the economic interest in the Company held by the noncontrolling interests. The Company allocates (loss) income to noncontrolling interests based on the substantive profit sharing provisions of the applicable operating agreements.
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 six months ended June 30, 2020 and 2019, the Holding Company increased its ownership interest in the Operating Company as a result of net equity transactions related to the Company’s share-based compensation plan.
6. CONSOLIDATED VARIABLE INTEREST ENTITY
The Holding Company conducts all of its operations through the Operating Company, a consolidated VIE, and as a result, substantially all of the Company’s assets and liabilities represent the assets and liabilities of the Operating Company, other than items attributed to income taxes and the payable pursuant to a tax receivable agreement (“TRA”), which was $173.2 million and $172.6 million at June 30, 2020 and December 31, 2019, respectively. The Operating Company has investments in, and consolidates the assets and liabilities of, the San Francisco Venture, FP LP and FPL, all of which have also been determined to be VIEs.
The San Francisco Venture is a VIE as the other members of the venture, individually or as a group, are not able to exercise kick-out rights or substantive participating rights. The Company applied the variable interest model and determined that it is the primary beneficiary of the San Francisco Venture and, accordingly, the San Francisco Venture is consolidated in its results. In making that determination, the Company evaluated that the Operating Company has unilateral and unconditional power to make decisions in regards to the activities that significantly impact the economics of the VIE, which are the development of properties, marketing and sale of properties, acquisition of land and other real estate properties and obtaining land ownership or ground lease for the underlying properties to be developed. The Company is determined to have more-than-insignificant economic benefit from the San Francisco Venture because, excluding Class C units, the Operating Company can prevent or cause the San Francisco Venture from making distributions on its units, and the Operating Company would receive 99% of any such distributions made (assuming no distributions had been paid on the Class A Common Units of the Operating Company). In addition, the San Francisco Venture is only allowed to make a capital call on the Operating Company and not any other interest holders, which could be a significant financial risk to the Operating Company.
As of June 30, 2020, the San Francisco Venture had total combined assets of $1,213.2 million, primarily comprised of $1,204.2 million of inventories, $2.8 million in related party assets and $0.1 million in cash and total combined liabilities of $104.6 million including $95.0 million in related party liabilities.
As of December 31, 2019, the San Francisco Venture had total combined assets of $1,197.1 million, primarily comprised of $1,186.2 million of inventories, $2.2 million in related party assets and $1.3 million in cash and total combined liabilities of $119.2 million including $102.4 million in related party liabilities.
Those assets are owned by, and those liabilities are obligations of, the San Francisco Venture, not the Company. The San Francisco Venture’s operating subsidiaries are not guarantors of the Company’s obligations, and the assets held by the San Francisco Venture may only be used as collateral for the San Francisco Venture’s obligations. The creditors of the San Francisco Venture do not have recourse to the assets of the Operating Company, as the VIE’s primary beneficiary, or of the Holding Company.
The Company and other partners do not generally have an obligation to make capital contributions to the San Francisco Venture. In addition, there are no liquidity arrangements or agreements to fund capital or purchase assets that could require the Company to provide financial support to the San Francisco Venture. The Company does not guarantee any debt of the San Francisco Venture. However, the Operating Company has guaranteed the performance of payment by the San Francisco Venture in accordance with the redemption terms of the Class C units of the San Francisco Venture (see Note 5).
FP LP and FPL are VIEs because the other partners or members have disproportionately fewer voting rights, and substantially all of the activities of the entities are conducted on behalf of the other partners or members and their related parties. The Operating Company, or a wholly owned subsidiary of the Operating Company, is the primary beneficiary of FP LP and FPL.
As of June 30, 2020, FP LP and FPL had combined assets of $980.8 million, primarily comprised of $774.7 million of inventories, $75.6 million of intangibles, $72.6 million in related party assets and $0.7 million in cash, and total combined liabilities of $106.7 million, including $97.7 million in accounts payable and other liabilities and $9.0 million in related party liabilities.
As of December 31, 2019, FP LP and FPL had combined assets of $900.0 million, primarily comprised of $703.6 million of inventories, $80.4 million of intangibles, $72.3 million in related party assets and $0.5 million in cash, and total
combined liabilities of $126.8 million, including $117.6 million in accounts payable and other liabilities and $9.2 million in related party liabilities.
The Company evaluates its primary beneficiary designation on an ongoing basis and assesses the appropriateness of the VIE’s status when events have occurred that would trigger such an analysis. During the six months ended June 30, 2020 and 2019, respectively, there were no VIEs that were deconsolidated.
7. INTANGIBLE ASSET, NET—RELATED PARTY
The intangible asset relates to the contract value of the incentive compensation provisions of the A&R DMA with the Great Park Venture. The intangible asset will be amortized over the contract period based on the pattern in which the economic benefits are expected to be received.
The carrying amount and accumulated amortization of the intangible asset as of June 30, 2020 and December 31, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Gross carrying amount
|
$
|
129,705
|
|
|
$
|
129,705
|
|
|
Accumulated amortization
|
(54,076)
|
|
|
(49,355)
|
|
|
Net book value
|
$
|
75,629
|
|
|
$
|
80,350
|
|
Intangible asset amortization expense, as a result of revenue recognition attributable to incentive compensation, was $2.3 million and $4.7 million for the three and six months ended June 30, 2020, respectively and $4.5 million and $8.8 million for the three and six months ended June 30, 2019, respectively. Amortization expense is included in the cost of management services in the accompanying condensed consolidated statements of operations.
8. RELATED PARTY TRANSACTIONS
Related party assets and liabilities included in the Company’s condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Related Party Assets:
|
|
|
|
|
Contract assets (see Note 3)
|
$
|
72,839
|
|
|
$
|
68,133
|
|
|
Operating lease right-of-use asset (see Note 11)
|
21,992
|
|
|
23,047
|
|
|
Other
|
2,542
|
|
|
6,381
|
|
|
|
$
|
97,373
|
|
|
$
|
97,561
|
|
|
Related Party Liabilities:
|
|
|
|
|
Reimbursement obligation
|
$
|
94,992
|
|
|
$
|
102,403
|
|
|
|
|
|
|
|
Payable to holders of Management Company’s Class B interests
|
9,000
|
|
|
9,000
|
|
|
Operating lease liability (see Note 11)
|
15,746
|
|
|
16,282
|
|
|
Other
|
21
|
|
|
197
|
|
|
|
$
|
119,759
|
|
|
$
|
127,882
|
|
Contingent Consideration to Class A Members of the San Francisco Venture
In early 2019, the Company and the members of a joint venture formed between affiliates of The Macerich Company, Lennar and Castlelake, that intended to construct a retail outlet shopping district at Candlestick decided not to proceed with the project. As part of the termination of the project, the San Francisco Venture was released from its obligation to convey parcels of property on which the project was intended to be developed and from certain development obligations. As a result of terminating the project and agreements related thereto, the San Francisco Venture recognized a gain of $64.9 million for the six months ended June 30, 2019, representing the settlement of the contingent consideration pertaining to the development obligations and relief from the conveyance of these parcels.
Concurrent with the termination of the retail mall project, 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.
Indirect Legacy Interest in Great Park Venture
The Company holds an indirect interest in rights to certain Legacy Interests in the Great Park Venture through an equity method investment. In January 2020, the Company received a $1.7 million Legacy Interest distribution from the Great Park Venture. At June 30, 2020 and December 31, 2019, the carrying value of the indirect interest was $0.1 million and $1.8 million, respectively and is included in other related party assets in the table above.
Reimbursement obligation
In April 2020, a related party affiliate agreed to defer, until April 2025, $12.6 million in reimbursement obligations that were due. The deferred amount will accrue interest at a rate of 6% per year and can be prepaid at any time without any premium or penalty. Additionally, the Company has been notified by related party affiliates that certain reimbursements that were previously expected to be due in 2020 have been deferred. These deferred amounts continue to incur interest at the original interest rate. Subject to extensions, the Company currently expects to make reimbursement payments of $49.4 million, $6.0 million, $26.9 million and $12.6 million in the balance of 2020, 2021, 2022 and 2025, respectively.
9. NOTES PAYABLE, NET
At June 30, 2020 and December 31, 2019, notes payable consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
7.875% Senior Notes due 2025
|
$
|
625,000
|
|
|
$
|
625,000
|
|
|
Unamortized debt issuance costs and discount
|
(8,186)
|
|
|
(8,954)
|
|
|
|
$
|
616,814
|
|
|
$
|
616,046
|
|
As of June 30, 2020, no funds have been drawn on the Operating Company’s $125.0 million revolving credit facility. However, letters of credit of $0.3 million are issued and outstanding under the revolving credit facility, thus reducing the available capacity to $124.7 million.
10. TAX RECEIVABLE AGREEMENT
The Company is a party to a TRA with all of the holders of Class A Common Units of the Operating Company, all the holders of Class A units of the San Francisco Venture, and prior holders of Class A Common Units of the Operating Company and prior holders of Class A Units of the San Francisco Venture that have exchanged their holdings for Class A common shares (as parties to the TRA, the “TRA Parties”). At June 30, 2020 and December 31, 2019, the Company’s condensed consolidated balance sheets include a liability of $173.2 million and $172.6 million, respectively, for payments expected to be made under certain components of the TRA which the Company deems to be probable and estimable. The Company may record adjustments to TRA liabilities if and when TRA Parties exchange Class A Common Units of the Operating Company for the Company’s Class A common shares or other equity transactions that impact the Holding Company’s ownership in the Operating Company. Changes in the Company’s estimates of the utilization of its deferred tax attributes and tax rates in effect may also result in subsequent adjustments to the amount of TRA liabilities recognized.
The term of the TRA will continue until all such tax benefits under the agreement have been utilized or expired, unless the Company exercises its right to terminate the TRA for an amount based on an agreed value of payments remaining to be made under the agreement. No TRA payments were made during the six months ended June 30, 2020 and 2019.
11. LEASES
The Company’s lessee arrangements consist of agreements to lease certain office facilities and equipment and the Company leases portions of its land to third parties for agriculture or other miscellaneous uses. The Company’s significant agriculture lease agreements are short-term in nature. As of June 30, 2020, all leasing arrangements are classified as operating leases.
The Company’s office leases have remaining lease terms of approximately four years to nine years and include one or more extension options to renew, some of which include options to extend the leases for up to ten years. The Company only includes renewal options in the lease term when it is reasonably certain that it will exercise such options.
The components of lease costs were as follows for the three and six months ended June 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Operating lease cost
|
|
$
|
552
|
|
|
$
|
666
|
|
|
$
|
1,106
|
|
|
$
|
1,327
|
|
|
Related party operating lease cost
|
|
788
|
|
|
783
|
|
|
1,577
|
|
|
1,567
|
|
|
Short-term lease cost
|
|
182
|
|
|
119
|
|
|
308
|
|
|
251
|
|
Supplemental balance sheet information related to leases as of June 30, 2020 and December 31, 2019 were as follows (in thousands, except lease term in years and discount rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Operating lease right-of-use assets ($21,992 and $23,047 related party, respectively)
|
|
$
|
30,449
|
|
|
$
|
32,579
|
|
|
Operating lease liabilities ($15,746 and $16,282 related party, respectively)
|
|
$
|
25,640
|
|
|
$
|
27,206
|
|
|
Weighted average remaining lease term (operating lease)
|
|
6.6
|
|
7.1
|
|
Weighted average discount rate (operating lease)
|
|
5.9
|
%
|
|
5.9
|
%
|
Operating lease right-of-use assets are included in other assets or related party assets and operating lease liabilities are included in accounts payable and other liabilities or related party liabilities on the condensed consolidated balance sheets.
The table below reconciles the undiscounted cash flows to the operating lease liabilities recorded on the condensed consolidated balance sheet as of June 30, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
Rental
Payments
|
|
2020 (excluding the six months ended June 30, 2020)
|
|
$
|
2,294
|
|
|
2021
|
|
5,263
|
|
|
2022
|
|
5,420
|
|
|
2023
|
|
5,583
|
|
|
2024
|
|
2,495
|
|
|
2025
|
|
2,474
|
|
|
Thereafter
|
|
8,096
|
|
|
Total lease payments
|
|
$
|
31,625
|
|
|
|
|
|
|
Discount
|
|
$
|
5,985
|
|
|
Total operating lease liabilities
|
|
$
|
25,640
|
|
12. COMMITMENTS AND CONTINGENCIES
The Company is subject to the usual obligations associated with entering into contracts for the purchase, development and sale of real estate, which the Company does in the routine conduct of its business. The operations of the Company are conducted through the Operating Company and its subsidiaries, and in some cases, the Holding Company will guarantee the performance of the Operating Company or its subsidiaries.
Valencia Project Approval Settlement
In September 2017, the Company reached a settlement with key national and state environmental and Native American organizations that were petitioners (the “Settling Petitioners”) in various legal challenges to Valencia’s regulatory approvals and permits. The Holding Company has provided a guaranty to the Settling Petitioners for monetary payments due from the Company as required under the settlement. As of June 30, 2020, the remaining estimated maximum potential amount of monetary payments subject to the guaranty was $23.8 million with the final payment due in 2026. The Company did not reach a settlement with two local environmental organizations that had pending challenges to certain Valencia project approvals. See “Legal Proceedings” below.
Performance and Completion Bonding Agreements
In the ordinary course of business and as a part of the entitlement and development process, the Company is required to provide performance bonds to ensure completion of certain development obligations. The Company had outstanding performance bonds of $243.7 million and $230.0 million as of June 30, 2020 and December 31, 2019, 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 Successor to the Redevelopment Agency of the City and County of San Francisco (the “San Francisco Agency”) in which the San Francisco Agency has agreed to convey portions of Candlestick and The San Francisco Shipyard to the San Francisco Venture for development. The San Francisco Venture has agreed to reimburse the San Francisco Agency for reasonable costs and expenses actually incurred and paid by the San Francisco Agency in performing its obligations under the disposition and development agreement.
At June 30, 2020 and December 31, 2019, the Company had outstanding guarantees benefiting the San Francisco Agency for infrastructure and construction of certain park and open space obligations with aggregate maximum obligations of $198.3 million and $197.8 million, respectively.
Letters of Credit
At June 30, 2020 and December 31, 2019, the Company had outstanding letters of credit totaling $1.8 million and $2.4 million, respectively. These letters of credit were issued to secure various development and financial obligations. At each of June 30, 2020 and December 31, 2019, the Company had restricted cash and certificates of deposit of $1.4 million pledged as collateral under certain of the letters of credit agreements.
Legal Proceedings
Landmark Village/Mission Village
During the pendency of certain prior litigation involving the approval of the original environmental impact reports and related permits for the Landmark Village and Mission Village projects at Valencia, in July 2017, the Los Angeles County Board of Supervisors certified the final additional environmental analyses required as a result of a prior California Supreme Court decision regarding the original greenhouse gas analysis related to the projects and reapproved the Landmark Village and Mission Village projects and related permits. In August 2017, two petitioners, Santa Clarita Organization for Planning and the Environment and Friends of the Santa Clara River (collectively, “Non-Settling Petitioners”), who did not participate in a settlement of prior litigation involving the Company and certain other petitioners, filed a new petition for writ of mandate in the Los Angeles Superior Court. The petition challenged Los Angeles County’s July 2017 approvals of the Mission Village and Landmark Village environmental analyses and the two projects based on claims arising under the California Environmental Quality Act and the California Water Code. The Superior Court held a hearing on the merits of the petition in September 2018. In December 2018, the Superior Court issued its written decision denying the Non-Settling Petitioners’ petition for writ of mandate. Thereafter, in January 2019, the Superior Court entered judgment on the petition for writ of mandate in favor of Los Angeles County and the Company. In March 2019, the Non-Settling Petitioners filed an appeal of the Superior Court’s ruling. In April 2020, the Court of Appeal issued a ruling affirming the Superior Court’s judgment in favor of the Company and Los Angeles County. In July 2020, the California Supreme Court issued an order denying the Non-Settling Petitioners’ petition to review the Court of Appeal’s decision. The judgment in favor of Los Angeles County and the Company is now final with no further right to appeal.
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 condensed consolidated financial statements.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the six months ended June 30, 2020 and 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
Cash paid for interest, all of which was capitalized to inventories
|
$
|
26,697
|
|
|
$
|
32,882
|
|
|
|
|
|
|
|
NONCASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of TRA liability
|
$
|
615
|
|
|
$
|
3,124
|
|
|
|
|
|
|
|
Purchase of properties and equipment in accounts payable
|
$
|
530
|
|
|
$
|
—
|
|
|
|
|
|
|
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows for the six months ended June 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Cash and cash equivalents
|
$
|
215,085
|
|
|
$
|
292,661
|
|
|
Restricted cash and certificates of deposit
|
1,742
|
|
|
1,739
|
|
|
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows
|
$
|
216,827
|
|
|
$
|
294,400
|
|
Amounts included in restricted cash and certificates of deposit represent amounts held as collateral on open letters of credit related to development obligations or because of other contractual obligations of the Company that require the restriction.
14. SEGMENT REPORTING
The Company’s reportable segments consist of:
• Valencia (formerly Newhall)—includes the community of Valencia (formerly known as Newhall Ranch) planned for development in northern Los Angeles County, California. The Valencia segment derives revenues from the sale of residential and commercial land sites to homebuilders, commercial developers and commercial buyers.
• 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.
• Great Park—includes the Great Park Neighborhoods being developed adjacent to and around the Orange County Great Park, a metropolitan park under construction in Orange County, California. This segment also includes management services provided by the Management Company to the Great Park Venture, the owner of the Great Park Neighborhoods. As of June 30, 2020, the Company had a 37.5% Percentage Interest in the Great Park Venture and accounted for the investment under the equity method. The reported segment information for the Great Park segment includes the results of 100% of the Great Park Venture at the historical basis of the venture, which did not apply push down accounting at acquisition date. The Great Park segment derives revenues from the sale of residential and commercial land sites to homebuilders, commercial developers and commercial buyers, and management services provided by the Company to the Great Park Venture.
• Commercial—includes Five Point Gateway Campus, an office, medical and research and development campus within the Great Park Neighborhoods, consisting of four newly constructed buildings and surrounding land that the Gateway Commercial Venture acquired in 2017. Two of the buildings are leased to one tenant, a subsidiary of Broadcom Inc., under a 20-year triple net lease which commenced in August 2017 (the “Broadcom Buildings”). The Company and a subsidiary of Lennar have entered into separate 130-month full service gross leases to occupy a portion of the third building. In May 2020, the Gateway Commercial Venture closed on the sale of the fourth building, including approximately 11 acres of land within the campus, to City of Hope, which intends to develop and
operate a comprehensive cancer care center and build a future micro hospital for a purchase price of $108.0 million. The gain on the asset sale for the Gateway Commercial Venture was $37.4 million. This segment also includes property management services provided by the Management Company to the Gateway Commercial Venture, the entity that owns the Five Point Gateway Campus. As of June 30, 2020, the Company had a 75% interest in the Gateway Commercial Venture and accounted for the investment under the equity method. The reported segment information for the Commercial segment includes the results of 100% of the Gateway Commercial Venture.
Segment operating results and reconciliations to the Company’s consolidated balances are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
Profit (Loss)
|
|
|
|
Revenues
|
|
|
|
Profit (Loss)
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Valencia
|
$
|
17,861
|
|
|
$
|
820
|
|
|
$
|
1,677
|
|
|
$
|
(4,261)
|
|
|
$
|
18,657
|
|
|
$
|
2,435
|
|
|
$
|
(3,117)
|
|
|
$
|
(8,345)
|
|
|
San Francisco
|
172
|
|
|
972
|
|
|
(2,466)
|
|
|
(4,465)
|
|
|
1,147
|
|
|
2,065
|
|
|
(5,558)
|
|
|
56,609
|
|
|
Great Park
|
6,827
|
|
|
43,854
|
|
|
(10,185)
|
|
|
(2,325)
|
|
|
36,355
|
|
|
213,413
|
|
|
(12,727)
|
|
|
37,943
|
|
|
Commercial
|
8,603
|
|
|
8,912
|
|
|
37,426
|
|
|
(1,406)
|
|
|
17,176
|
|
|
17,261
|
|
|
36,788
|
|
|
(2,187)
|
|
|
Total reportable segments
|
33,463
|
|
|
54,558
|
|
|
26,452
|
|
|
(12,457)
|
|
|
73,335
|
|
|
235,174
|
|
|
15,386
|
|
|
84,020
|
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Removal of results of unconsolidated entities—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Great Park Venture (1)
|
(650)
|
|
|
(33,417)
|
|
|
11,959
|
|
|
5,536
|
|
|
(22,826)
|
|
|
(192,580)
|
|
|
16,277
|
|
|
(31,575)
|
|
|
Gateway Commercial Venture (1)
|
(8,506)
|
|
|
(8,754)
|
|
|
(37,329)
|
|
|
1,564
|
|
|
(16,982)
|
|
|
(17,134)
|
|
|
(36,594)
|
|
|
2,314
|
|
|
Add equity in earnings (losses) from unconsolidated entities—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Great Park Venture
|
—
|
|
|
—
|
|
|
(4,092)
|
|
|
(1,496)
|
|
|
—
|
|
|
—
|
|
|
(34,452)
|
|
|
7,948
|
|
|
Gateway Commercial Venture
|
—
|
|
|
—
|
|
|
27,997
|
|
|
(1,173)
|
|
|
—
|
|
|
—
|
|
|
27,446
|
|
|
(1,735)
|
|
|
Corporate and unallocated (2)
|
—
|
|
|
—
|
|
|
(10,749)
|
|
|
(14,602)
|
|
|
—
|
|
|
—
|
|
|
(27,044)
|
|
|
(30,867)
|
|
|
Total consolidated balances
|
$
|
24,307
|
|
|
$
|
12,387
|
|
|
$
|
14,238
|
|
|
$
|
(22,628)
|
|
|
$
|
33,527
|
|
|
$
|
25,460
|
|
|
$
|
(38,981)
|
|
|
$
|
30,105
|
|
(1) Represents the removal of the Great Park Venture’s and Gateway Commercial Venture’s operating results that are included in the Great Park segment and Commercial segment operating results, respectively, but are not included in the Company’s consolidated results.
(2) Corporate and unallocated activity is primarily comprised of corporate general, and administrative expenses.
Segment assets and reconciliations to the Company’s consolidated balances are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Valencia
|
$
|
833,134
|
|
|
$
|
748,082
|
|
|
San Francisco
|
1,213,156
|
|
|
1,197,081
|
|
|
Great Park
|
1,253,477
|
|
|
1,356,417
|
|
|
Commercial (1)
|
405,291
|
|
|
473,409
|
|
|
Total reportable segments
|
3,705,058
|
|
|
3,774,989
|
|
|
Reconciling items:
|
|
|
|
|
Removal of unconsolidated balances of Great Park Venture (2)
|
(1,092,295)
|
|
|
(1,196,258)
|
|
|
Removal of unconsolidated balances of Gateway Commercial Venture (2)
|
(405,259)
|
|
|
(473,398)
|
|
|
Other eliminations (3)
|
(16,665)
|
|
|
(8,310)
|
|
|
Add investment balance in Great Park Venture
|
396,964
|
|
|
431,835
|
|
|
Add investment balance in Gateway Commercial Venture
|
72,600
|
|
|
101,404
|
|
|
Corporate and unallocated (4)
|
247,900
|
|
|
374,438
|
|
|
Total consolidated balances
|
$
|
2,908,303
|
|
|
$
|
3,004,700
|
|
(1) Included in total Commercial segment assets are the Broadcom Buildings that are expected to be sold in August 2020.
(2) Represents the removal of the Great Park Venture’s and Gateway Commercial Venture’s balances that are included in the Great Park segment and Commercial segment balances, respectively, but are not included in the Company’s consolidated balances.
(3) Represents intersegment balances that eliminate in consolidation.
(4) Corporate and unallocated assets consist of cash and cash equivalents, receivables, right-of-use assets and prepaid expenses.
15. SHARE-BASED COMPENSATION
The Company has an incentive award plan pursuant to which the Company has granted restricted share units (“RSUs”) and restricted share awards either fully vested, with service conditions or with service and market performance conditions based on the market price of the Company’s Class A common shares. Awards with a service condition generally vest over a three-year period or in the case of non-employee directors over one year. Awards with a service and market performance condition generally vest at the end of a three-year period. Restricted share awards entitle the holders to non-forfeitable distributions and to vote the underlying Class A common share during the restricted period. As of June 30, 2020, there were 4,683,907 remaining Class A common shares available for future issuance under the Incentive Award Plan.
The Company estimates the fair value of restricted share awards with a service condition based on the closing market price of the Company’s Class A common shares on the award’s grant date. The grant date fair value of awards with a market condition are determined using a Monte-Carlo approach.
In January 2020, the Company reacquired vested RSUs and restricted Class A common shares for $5.5 million for the purpose of settling tax withholding obligations of employees. The reacquisition cost is based on the fair value of the Company’s Class A common shares on the date the tax obligation is incurred.
The following table summarizes share-based equity compensation activity for the six months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-Based Awards
(in thousands)
|
|
Weighted-
Average Grant
Date Fair Value
|
|
Nonvested at January 1, 2020
|
3,011
|
|
|
$
|
9.02
|
|
|
Granted
|
677
|
|
|
$
|
8.09
|
|
|
Forfeited
|
(307)
|
|
|
$
|
6.88
|
|
|
Vested
|
(1,071)
|
|
|
$
|
12.64
|
|
|
Nonvested at June 30, 2020
|
2,310
|
|
|
$
|
7.36
|
|
Share-based compensation expense was $2.8 million and $5.8 million for the three and six months ended June 30, 2020, respectively and $3.4 million and $6.8 million for the three and six months ended June 30, 2019, respectively. Share-based compensation expense is included in selling, general, and administrative expenses in the accompanying condensed consolidated statements of operations. Approximately $11.7 million of total unrecognized compensation cost related to non-vested awards is expected to be recognized over a weighted–average period of 1.6 years from June 30, 2020. The estimated fair value at vesting of share-based awards that vested during the six months ended June 30, 2020 was $8.6 million.
16. EMPLOYEE BENEFIT PLANS
The Newhall Land and Farming Company Retirement Plan (the “Retirement Plan”) is a defined benefit plan that is funded by the Company and qualified under the Employee Retirement Income Security Act. In 2004, the Retirement Plan was amended to cease future benefit accruals and the Retirement Plan was frozen. The Company’s funding policy is to contribute amounts sufficient to meet minimum requirements but not more than the maximum tax-deductible amount. The Company expects to contribute $0.6 million to the Retirement Plan in 2020 and made a contribution of $0.3 million during the six months ended June 30, 2020.
The components of net periodic benefit for the three and six months ended June 30, 2020 and 2019, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net periodic benefit:
|
|
|
|
|
|
|
|
|
Interest cost
|
$
|
164
|
|
|
$
|
208
|
|
|
$
|
328
|
|
|
$
|
416
|
|
|
Expected return on plan assets
|
(276)
|
|
|
(252)
|
|
|
(552)
|
|
|
(505)
|
|
|
Amortization of net actuarial loss
|
24
|
|
|
35
|
|
|
48
|
|
|
70
|
|
|
Net periodic benefit
|
$
|
(88)
|
|
|
$
|
(9)
|
|
|
$
|
(176)
|
|
|
$
|
(19)
|
|
Net periodic benefit does not include a service cost component as a result of the Retirement Plan being frozen. All other components of net periodic benefit are included in other income on the condensed consolidated statements of operations.
17. INCOME TAXES
The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes, which requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statements and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for the years in which taxes are expected to be paid or recovered.
Upon formation, the Holding Company elected to be treated as a corporation for U.S. federal, state, and local tax purposes. All operations are carried on through the Holding Company’s subsidiaries, the majority of which are pass-through entities that are generally not subject to federal or state income taxation, as all of the taxable income, gains, losses, deductions, and credits are passed through to the partners. The Holding Company is responsible for income taxes on its share of taxable income or loss passed through from the operating subsidiaries.
In the three months ended June 30, 2020, the Company recorded no provision or benefit for income taxes (after application of a decrease in the Company’s valuation allowance) on pre-tax income of $14.2 million. In the three months ended June 30, 2019, the Company recorded no provision for income taxes (after application of an increase in the Company’s valuation allowance) on pre-tax income of $22.6 million. In the six months ended June 30, 2020, the Company recorded no provision or benefit for income taxes (after application of an increase in the Company’s valuation allowance) on pre-tax loss of $39.0 million. In the six months ended June 30, 2019, the Company recorded a $1.3 million provision for income taxes (after application of a decrease in the Company’s valuation allowance) on pre-tax income of $31.4 million. The effective tax rates for the six months ended June 30, 2020 and 2019, differ from the 21% federal statutory rate and applicable state statutory rates primarily due to the Company’s valuation allowance on its book losses, disallowance of executive compensation expenses not deductible for tax, and to the pre-tax portion of income and losses that are passed through to the other partners of the Operating Company and the San Francisco Venture. The Company’s tax provision for the six months ended June 30, 2019 relates to adjustments to the Company’s valuation allowance resulting from the limitation on post-2017 net operating losses to offset only 80% of deferred tax liabilities which was treated as a discrete event.
Each quarter the Company assesses its deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable under the guidance of ASC Topic 740, Income Taxes. The Company is required to establish a valuation allowance for any portion of the asset it concludes is more likely than not unrealizable. The Company’s assessment considers, among other things, the nature, frequency and severity of prior cumulative losses, forecasts of future taxable income, the duration of statutory carryforward periods, its utilization experience with operating loss and tax credit carryforwards and tax planning alternatives, to the extent these items are applicable. Largely due to a history of book losses, the Company has recorded a valuation allowance against its federal and state net deferred tax assets.
The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. Fiscal years 2015 through 2018 generally remain subject to examination by federal and state tax authorities. The Company is not currently under examination by any tax authority. The Company classifies any interest and penalties related to income taxes assessed by jurisdiction as part of income tax expense. The Company has concluded that there were no significant uncertain tax positions requiring recognition in its financial statements, nor has the Company been assessed interest or penalties by any major tax jurisdictions related to any open tax periods. The Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law on March 27, 2020. The CARES Act includes various income and payroll tax provisions that the Company is in the process of analyzing to determine the financial impact on its condensed consolidated financial statements. The Company is taking advantage of some of the payroll tax deferrals provided in the CARES Act. The Company does not believe that any aspects of the CARES Act are material to the tax provision during the three and six months ended June 30, 2020.
18. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS AND DISCLOSURES
ASC Topic 820, Fair Values Measurement, emphasizes that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. The following hierarchy classifies the inputs used to determine fair value into three levels:
Level 1—Quoted prices for identical instruments in active markets
Level 2—Quoted prices for similar instruments in active markets or inputs, other than quoted prices, that are observable for the instrument either directly or indirectly
Level 3—Significant inputs to the valuation model are unobservable
At each reporting period, the Company evaluates the fair value of its financial instruments. Other than notes payable, net, the carrying amount of the Company’s financial instruments, which includes cash and cash equivalents, restricted cash and certificates of deposit, certain related party assets and liabilities, and accounts payable and other liabilities, approximated the Company’s estimates of fair value at both June 30, 2020 and December 31, 2019. The fair value of the Company’s notes payable, net, are estimated based on quoted market prices (level 2). At June 30, 2020, the estimated fair value of notes payable, net was $600.0 million compared to a carrying value of $616.8 million. At December 31, 2019, the estimated fair value of notes payable, net was $631.1 million compared to a carrying value of $616.0 million. During the three and six months ended June 30, 2020 and 2019, the Company had no assets that were measured at fair value on a nonrecurring basis, other than the Company’s investment in the Great Park Venture (see Note 4).
19. EARNINGS PER SHARE
The Company uses the two-class method in its computation of earnings per share. Pursuant to the terms of the Holding Company’s Second Amended and Restated Limited Liability Company Agreement, the Class A common shares and the Class B common shares are entitled to receive distributions at different rates, with each Class B common share receiving 0.03% of the distributions paid on each Class A common share. Under the two-class method, the Company’s net income available to common shareholders is allocated between the two classes of common shares on a fully-distributed basis and reflects residual net income after amounts attributed to noncontrolling interests. In the event of a net loss, the Company determined that both classes share in the Company’s losses, and they share in the losses using the same mechanism as the distributions. The Company also has restricted share awards and performance restricted share awards (see Note 15) that have a right to non-forfeitable dividends while unvested and are contemplated as participating when the Company is in a net income position. These awards participate in distributions on a basis equivalent to other Class A common shares but do not participate in losses.
No distributions were declared for the three and six months ended June 30, 2020 and 2019. The Company operated in a net income and net loss position for the three and six months ended June 30, 2020, respectively. The Company operated in a net loss and net income position for the three and six months ended June 30, 2019, respectively. As a result, net income (loss) attributable to the parent was allocated to the Class A common shares and Class B common shares in an amount per Class B common share equal to 0.03% multiplied by the amount per Class A common share. Basic income (loss) per Class A common share is determined by dividing net income (loss) allocated to Class A Common shareholders by the weighted average number of Class A common shares outstanding for the period. Basic income (loss) per Class B common share is determined by dividing net income (loss) allocated to the Class B common shares by the weighted average number of Class B common shares outstanding during the period.
Diluted income (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 (loss) per share.
The following table summarizes the basic and diluted earnings per share calculations for the three and six months ended June 30, 2020 and 2019 (in thousands, except shares and per share amounts):
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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2020
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2019
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2020
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2019
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Numerator:
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Net income (loss) attributable to the Company
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$
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6,632
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$
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(10,512)
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$
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(18,174)
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$
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13,296
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Adjustments to net income (loss) attributable to the Company
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—
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208
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355
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70
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Net income (loss) attributable to common shareholders
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$
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6,632
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$
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(10,304)
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$
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(17,819)
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$
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13,366
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Numerator—basic common shares:
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Net income (loss) attributable to common shareholders
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$
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6,632
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$
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(10,304)
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$
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(17,819)
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$
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13,366
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Less: net income allocated to participating securities
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$
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223
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$
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—
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$
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—
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$
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568
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Allocation of net income (loss) among common shareholders
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$
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6,409
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$
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(10,304)
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$
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(17,819)
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$
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12,798
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Numerator for basic net income (loss) available to Class A common shareholders
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$
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6,406
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$
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(10,300)
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$
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(17,813)
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$
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12,793
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Numerator for basic net income (loss) available to Class B common shareholders
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$
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3
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$
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(4)
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$
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(6)
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$
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5
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Numerator—diluted common shares:
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Net income (loss) attributable to common shareholders
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$
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6,632
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$
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(10,304)
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$
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(17,819)
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$
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13,366
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Reallocation of income (loss) to Company upon assumed exchange of units
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$
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7,307
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$
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—
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$
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(701)
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$
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14,028
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Less: net income allocated to participating securities
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$
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223
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$
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—
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$
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—
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$
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568
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Allocation of net income (loss) among common shareholders
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$
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13,716
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$
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(10,304)
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$
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(18,520)
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$
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26,826
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Numerator for diluted net income (loss) available to Class A common shareholders
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$
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13,713
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$
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(10,300)
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$
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(18,514)
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$
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26,821
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Numerator for diluted net income (loss) available to Class B common shareholders
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$
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3
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$
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(4)
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$
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(6)
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$
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5
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Denominator:
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Basic weighted average Class A common shares outstanding
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66,731,233
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66,256,961
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66,690,550
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66,234,066
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Diluted weighted average Class A common shares outstanding
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142,851,412
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66,256,961
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68,854,356
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145,403,189
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Basic weighted average Class B common shares outstanding
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79,233,544
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79,275,234
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79,233,544
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79,169,124
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Diluted weighted average Class B common shares outstanding
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79,233,544
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79,275,234
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79,233,544
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79,275,824
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Basic income (loss) per share:
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Class A common shares
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$
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0.10
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$
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(0.16)
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$
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(0.27)
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$
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0.19
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Class B common shares
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$
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0.00
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$
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(0.00)
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$
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(0.00)
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$
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0.00
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Diluted income (loss) per share:
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Class A common shares
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$
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0.10
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$
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(0.16)
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$
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(0.27)
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$
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0.18
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Class B common shares
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$
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0.00
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$
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(0.00)
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$
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(0.00)
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$
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0.00
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Anti-dilutive potential RSUs
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—
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36,289
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—
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36,289
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Anti-dilutive potential Performance RSUs
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338,813
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388,155
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338,813
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388,155
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Anti-dilutive potential Restricted Shares (weighted average)
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—
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2,257,787
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1,762,969
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—
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Anti-dilutive potential Performance Restricted Shares (weighted average)
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—
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776,312
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713,415
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—
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Anti-dilutive potential Class A common shares (weighted average)
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3,137,134
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79,299,016
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76,120,179
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—
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20. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss attributable to the Company consists of unamortized defined benefit pension plan net actuarial losses that totaled $2.7 million at both June 30, 2020 and December 31, 2019, net of tax benefits of $0.7 million and $0.8 million, respectively. At both June 30, 2020 and December 31, 2019, the Company held a full valuation allowance related to the accumulated tax benefits. Accumulated other comprehensive loss of $1.6 million and $1.6 million is included in noncontrolling interests at June 30, 2020 and December 31, 2019, respectively. Net actuarial gains or losses are re-determined annually or upon remeasurement events and principally arise from changes in the rate used to discount benefit obligations and differences between expected and actual returns on plan assets. Reclassifications from accumulated other comprehensive loss to net loss related to amortization of net actuarial losses were approximately $30,000 and $44,000, net of taxes, for the six months ended June 30, 2020 and 2019, respectively, and are included in other miscellaneous income in the accompanying condensed consolidated statements of operations.