Quarterly Report (10-q)

Date : 05/08/2019 @ 11:35AM
Source : Edgar (US Regulatory)
Stock : Five Point Holdings, Llc Class A (FPH)
Quote : 6.96  -0.04 (-0.57%) @ 11:01PM

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-38088
Five Point Holdings, LLC
(Exact name of registrant as specified in its charter)
Delaware
 
27-0599397
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
15131 Alton Parkway, Suite 400
Irvine, California
(Address of Principal Executive Offices)
 

92618  
(Zip code)
(949) 349-1000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
 
Accelerated filer
x
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A common shares
FPH
New York Stock Exchange
As of April 30, 2019 , 68,746,555 Class A common shares and 79,275,234 Class B common shares were outstanding.
 



FIVE POINT HOLDINGS, LLC

TABLE OF CONTENTS

FORM 10-Q

 
 
Page
 
PART I. FINANCIAL INFORMATION
 
ITEM 1.
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
 
PART II. OTHER INFORMATION
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
 



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are subject to risks and uncertainties. These statements concern expectations, beliefs, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “would,” “result” and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements. This report may contain forward-looking statements regarding: our expectations of our future revenues, costs and financial performance; future demographics and market conditions in the areas where our communities are located; the outcome of pending litigation and its effect on our operations; the timing of our development activities; and the timing of future real estate purchases or sales.
We caution you that any forward-looking statements presented in this report are based on our current views and information currently available to us. Forward-looking statements are subject to risks, trends, uncertainties and factors that are beyond our control. We believe these risks and uncertainties include, but are not limited to, the following:
risks associated with the real estate industry;
downturns in economic conditions or demographic changes at the national, regional or local levels, particularly in the areas where our properties are located;
uncertainty and risks related to zoning and land use laws and regulations, including environmental planning and protection laws;
risks associated with development and construction projects;
adverse developments in the economic, political, competitive or regulatory climate of California;
loss of key personnel;
uncertainties and risks related to adverse weather conditions, natural disasters and climate change;
fluctuations in interest rates;
the availability of cash for distribution and debt service and exposure to risk of default under debt obligations;
exposure to liability relating to environmental and health and safety matters;
exposure to litigation or other claims;
insufficient amounts of insurance or exposure to events that are either uninsured or underinsured;
intense competition in the real estate market and our ability to sell properties at desirable prices;
fluctuations in real estate values;
changes in property taxes;
risks associated with our trademarks, trade names and service marks;
conflicts of interest with our directors;
general volatility of the capital and credit markets and the price of our Class A common shares; and
risks associated with public or private financing or the unavailability thereof.
Please see Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 for a more detailed discussion of these and other risks.
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you therefore against relying on any of these forward-looking statements.
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. They are based on estimates and assumptions only as of the date of this report. We undertake no obligation to update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by applicable law.



PART I. FINANCIAL INFORMATION

ITEM 1.    Financial Statements

FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except shares)
(Unaudited)

 
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
INVENTORIES
$
1,744,337

 
$
1,696,084

INVESTMENT IN UNCONSOLIDATED ENTITIES
540,318

 
532,899

PROPERTIES AND EQUIPMENT, NET
32,551

 
31,677

INTANGIBLE ASSET, NET—RELATED PARTY
91,620

 
95,917

CASH AND CASH EQUIVALENTS
373,292

 
495,694

RESTRICTED CASH AND CERTIFICATES OF DEPOSIT
1,738

 
1,403

RELATED PARTY ASSETS
83,044

 
61,039

OTHER ASSETS
18,650

 
9,179

TOTAL
$
2,885,550

 
$
2,923,892

 
 
 
 
LIABILITIES AND CAPITAL
 
 
 
LIABILITIES:
 
 
 
Notes payable, net
$
492,171

 
$
557,004

Accounts payable and other liabilities
153,112

 
161,139

Related party liabilities
129,260

 
178,540

Deferred income tax liability, net
10,449

 
9,183

Payable pursuant to tax receivable agreement
171,205

 
169,509

Total liabilities
956,197

 
1,075,375

 
 
 
 
COMMITMENTS AND CONTINGENT LIABILITIES (Note 12)

 

REDEEMABLE NONCONTROLLING INTEREST
$
25,000

 
$

CAPITAL:
 
 
 
Class A common shares; No par value; Issued and outstanding: 2019—68,746,555 shares; 2018—66,810,980 shares
 
 
 
Class B common shares; No par value; Issued and outstanding: 2019—79,275,234 shares; 2018—78,838,736 shares
 
 
 
Contributed capital
562,185

 
556,521

Retained earnings
57,619

 
33,811

Accumulated other comprehensive loss
(3,320
)
 
(3,306
)
Total members’ capital
616,484

 
587,026

Noncontrolling interests
1,287,869

 
1,261,491

Total capital
1,904,353

 
1,848,517

TOTAL
$
2,885,550

 
$
2,923,892


See accompanying notes to unaudited condensed consolidated financial statements.


1


FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)

 
Three Months Ended
March 31,
 
2019
 
2018
REVENUES:
 
 
 
Land sales
$
55

 
$
49

Land sales—related party
230

 
221

Management services—related party
11,063

 
11,767

Operating properties
1,725

 
2,930

Total revenues
13,073

 
14,967

COSTS AND EXPENSES:
 
 
 
Land sales

 
38

Management services
7,616

 
7,089

Operating properties
1,901

 
2,390

Selling, general, and administrative
25,773

 
28,596

Total costs and expenses
35,290

 
38,113

OTHER INCOME:
 
 
 
Adjustment to payable pursuant to tax receivable agreement

 
1,928

Interest income
2,454

 
2,747

Gain on settlement of contingent consideration—related party
64,870

 

Miscellaneous
10

 
7,781

Total other income
67,334

 
12,456

EQUITY IN EARNINGS (LOSS) FROM UNCONSOLIDATED ENTITIES
8,882

 
(3,607
)
INCOME (LOSS) BEFORE INCOME TAX (PROVISION) BENEFIT
53,999

 
(14,297
)
INCOME TAX (PROVISION) BENEFIT
(1,266
)
 

NET INCOME (LOSS)
52,733

 
(14,297
)
LESS NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS
28,925

 
(9,065
)
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
$
23,808

 
$
(5,232
)
 
 
 
 
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY PER CLASS A SHARE
 
 
 
Basic
$
0.35

 
$
(0.08
)
Diluted
$
0.35

 
$
(0.10
)
WEIGHTED AVERAGE CLASS A SHARES OUTSTANDING
 
 
 
Basic
66,210,916

 
63,367,419

Diluted
145,296,469

 
144,812,299

NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY PER CLASS B SHARE
 
 
 
Basic and diluted
$
0.00

 
$
(0.00
)
WEIGHTED AVERAGE CLASS B SHARES OUTSTANDING
 
 
 
Basic
79,061,835

 
81,420,455

Diluted
79,275,234

 
81,420,455


See accompanying notes to unaudited condensed consolidated financial statements.


2


FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)

 
Three Months Ended
March 31,
 
2019
 
2018
NET INCOME (LOSS)
$
52,733

 
$
(14,297
)
OTHER COMPREHENSIVE INCOME:
 
 
 
Reclassification of actuarial loss on defined benefit pension plan included in net income (loss)
35

 
22

Other comprehensive income before taxes
35

 
22

INCOME TAX PROVISION RELATED TO OTHER COMPREHENSIVE INCOME

 

OTHER COMPREHENSIVE INCOME—Net of tax
35

 
22

COMPREHENSIVE INCOME (LOSS)
52,768

 
(14,275
)
LESS COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS
28,938

 
(9,056
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
$
23,830

 
$
(5,219
)

See accompanying notes to unaudited condensed consolidated financial statements.



3


FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL
(In thousands, except share amounts)
(Unaudited)
 
Class A
Common
Shares
 
Class B
Common
Shares
 
Contributed
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Members’
Capital
 
Noncontrolling
Interests
 
Total
Capital
BALANCE - December 31, 2018
66,810,980

 
78,838,736

 
$
556,521

 
$
33,811

 
$
(3,306
)
 
$
587,026

 
$
1,261,491

 
$
1,848,517

Net income

 

 

 
23,808

 

 
23,808

 
28,925

 
52,733

Share-based compensation expense

 

 
3,316

 

 

 
3,316

 

 
3,316

Reacquisition of share-based compensation awards for tax-withholding purposes
(296,392
)
 

 
(4,099
)
 

 

 
(4,099
)
 

 
(4,099
)
Settlement of restricted share units for Class A common shares
337,799

 

 

 

 

 

 

 

Issuance of share-based compensation awards, net of forfeitures
1,894,168

 

 

 

 

 

 

 

Other comprehensive income—net of tax of $0

 

 

 

 
22

 
22

 
13

 
35

Contribution from noncontrolling interest and related sale of Class B common shares

 
436,498

 
3

 

 

 
3

 
5,544

 
5,547

Adjustment to liability recognized under tax receivable agreement—net of tax of $0

 

 
(1,696
)
 

 

 
(1,696
)
 

 
(1,696
)
Adjustment of noncontrolling interest in the Operating Company

 

 
8,140

 

 
(36
)
 
8,104

 
(8,104
)
 

BALANCE - March 31, 2019
68,746,555

 
79,275,234

 
$
562,185

 
$
57,619

 
$
(3,320
)
 
$
616,484

 
$
1,287,869

 
$
1,904,353

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE - December 31, 2017
62,314,850

 
81,463,433

 
$
530,015

 
$
57,841

 
$
(2,455
)
 
$
585,401

 
$
1,320,208

 
$
1,905,609

Adoption of accounting standards

 

 

 
10,684

 

 
10,684

 
13,961

 
24,645

Net loss

 

 

 
(5,232
)
 

 
(5,232
)
 
(9,065
)
 
(14,297
)
Share-based compensation expense

 

 
3,399

 

 

 
3,399

 

 
3,399

Reacquisition of share-based compensation for tax-withholding purposes
(68,886
)
 

 
(5,131
)
 

 

 
(5,131
)
 

 
(5,131
)
Settlement of restricted share units for Class A common shares
319,783

 

 

 

 

 

 

 

Issuance of share-based compensation awards, net of forfeitures
1,656,838

 

 

 

 

 

 

 

Other comprehensive income—net of tax of $0

 

 

 

 
13

 
13

 
9

 
22

Redemption of noncontrolling interests
45,442

 
(45,430
)
 
817

 

 
(1
)
 
816

 
(816
)
 

Adjustment to liability recognized under tax receivable agreement—net of tax of $0

 

 
(2,308
)
 

 

 
(2,308
)
 

 
(2,308
)
Adjustment of noncontrolling interest in the Operating Company

 

 
9,108

 

 
(31
)
 
9,077

 
(9,077
)
 

BALANCE - March 31, 2018
64,268,027

 
81,418,003

 
$
535,900

 
$
63,293

 
$
(2,474
)
 
$
596,719

 
$
1,315,220

 
$
1,911,939


See accompanying notes to unaudited condensed consolidated financial statements.


4


FIVE POINT HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited )
 
Three Months Ended
March 31,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$
52,733

 
$
(14,297
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Equity in (earnings) loss from unconsolidated entities
(8,882
)
 
3,607

Deferred income taxes
1,266

 

Depreciation and amortization
5,578

 
3,891

Noncash adjustment of payable pursuant to tax receivable agreement

 
(1,928
)
Gain on settlement of contingent consideration—related party
(64,870
)
 

Gain on sale of golf course operating properties

 
(6,700
)
Gain on insurance proceeds for damaged property

 
(1,000
)
Share-based compensation
3,316

 
3,399

Changes in operating assets and liabilities:
 
 
 
Inventories
(47,863
)
 
(54,643
)
Related party assets
(3,588
)
 
(3,346
)
Other assets
1,394

 
629

Accounts payable and other liabilities
(19,417
)
 
(789
)
Related party liabilities
(3,319
)
 
24

Net cash used in operating activities
(83,652
)
 
(71,153
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Distribution from Gateway Commercial Venture
1,463

 

Proceeds from sale of golf course operating property

 
5,685

Proceeds from insurance on damaged property

 
370

Purchase of properties and equipment
(1,196
)
 
(7
)
Net cash provided by investing activities
267

 
6,048

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Principal payment on Macerich note
(65,130
)
 

Reacquisition of share-based compensation awards for tax-withholding purposes
(4,099
)
 
(5,131
)
Proceeds from issuance of Class B common shares
3

 

Contribution from noncontrolling interest
5,544

 

Proceeds from issuance of redeemable noncontrolling interest
25,000

 

Net cash used in financing activities
(38,682
)
 
(5,131
)
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
(122,067
)
 
(70,236
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—Beginning of period
497,097

 
849,945

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—End of period
$
375,030

 
$
779,709

SUPPLEMENTAL CASH FLOW INFORMATION (Note 13)
See accompanying notes to unaudited condensed consolidated financial statements.


5


FIVE POINT HOLDINGS, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.    BUSINESS AND ORGANIZATION
Five Point Holdings, LLC, a Delaware limited liability company (the “Holding Company” and, together with its consolidated subsidiaries, the “Company”), is an owner and developer of mixed-use, master-planned communities in California. The Holding Company owns all of its assets and conducts all of its operations through Five Point Operating Company, LP, a Delaware limited partnership (the “Operating Company”), and its subsidiaries.
The Company has two classes of shares outstanding: Class A common shares and Class B common shares. Holders of Class A common shares and holders of Class B common shares are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders, and are both entitled to receive distributions at the same time. However, the distributions paid to holders of our Class B common shares are in an amount per share equal to 0.0003 multiplied by the amount paid per Class A common share.
The diagram below presents a simplified depiction of the Company’s current organizational structure as of March 31, 2019 :
ORGCHARTA02.JPG
(1) A wholly owned subsidiary of the Holding Company serves as the sole managing general partner of the Operating Company. As of March 31, 2019 , the Company owned approximately 62.4% of the outstanding Class A Common Units of the Operating Company. After a one year holding period, a holder of Class A Common Units of the Operating Company can exchange the units for, at the Company’s option, either Class A common shares of the Holding Company, on a one -for-one basis, or cash equal to the fair market value of such shares. Assuming the exchange of all outstanding Class A Common Units of the Operating Company and all outstanding Class A units of The Shipyard Communities, LLC, a Delaware limited liability company (the “San Francisco Venture”) (see (2) below), that are not held by the Company, based on the closing price of the Company’s Class A common shares on April 30, 2019 ( $8.51 ), the equity market capitalization of the Company was approximately $1.3 billion .


6


(2) The Operating Company owns all of the outstanding Class B units of the San Francisco Venture, the entity developing the Candlestick and The San Francisco Shipyard communities. The Class A units of the San Francisco Venture, which the Operating Company does not own, are intended to be economically equivalent to Class A Common Units of the Operating Company. As the holder of all outstanding Class B units, the Operating Company is entitled to receive 99% of available cash from the San Francisco Venture after the holders of Class A units in the San Francisco Venture have received distributions equivalent to the distributions, if any, paid on Class A Common Units of the Operating Company. Class A units of the San Francisco Venture can be exchanged, on a one -for-one basis, for Class A Common Units of the Operating Company (See Note 5).
(3) Together, the Operating Company, Five Point Communities, LP, a Delaware limited partnership (“FP LP”), and Five Point Communities Management, Inc., a Delaware corporation (“FP Inc.” and together with FP LP, the “Management Company”) own 100% of Five Point Land, LLC, a Delaware limited liability company (“FPL”), the entity developing Valencia (formerly known as Newhall Ranch), a master-planned community located in northern Los Angeles County, California. The Operating Company has a controlling interest in the Management Company.
(4) Interests in Heritage Fields LLC, a Delaware limited liability company (the “Great Park Venture”), are either “Percentage Interests” or “Legacy Interests.” Holders of the Legacy Interests are entitled to receive priority distributions in an amount up to $565.0 million , of which $355.0 million had been distributed as of April 30, 2019 . The Company owns a 37.5% Percentage Interest in the Great Park Venture and serves as its administrative member. However, management of the Great Park Venture is vested in the four voting members, who have a total of five votes. Major decisions generally require the approval of at least 75% of the votes of the voting members. The Company has two votes, and the other three voting members each have one vote, so the Company is unable to approve any major decision without the consent or approval of at least two of the other voting members. The Company does not include the Great Park Venture as a consolidated subsidiary, but rather as an equity method investee in its consolidated financial statements.
(5) The Company owns a 75% interest in Five Point Office Venture Holdings I, LLC, a Delaware limited liability company (the “Gateway Commercial Venture”). The Gateway Commercial Venture owns approximately 73 acres of commercial land in the Great Park Neighborhoods, on which four buildings have been newly constructed with an aggregate of approximately one million square feet of research and development and office space (the “Five Point Gateway Campus”). The Company manages the Gateway Commercial Venture, however, the manager’s authority is limited. Major decisions by the Gateway Commercial Venture generally require unanimous approval by an executive committee composed of two people designated by the Company and two people designated by another investor. Some decisions require approval by all of the members of the Gateway Commercial Venture. The Company does not include the Gateway Commercial Venture as a consolidated subsidiary, but rather as an equity method investee in its consolidated financial statements.

2.    BASIS OF PRESENTATION
Principles of consolidation —The accompanying condensed consolidated financial statements include the accounts of the Holding Company and the accounts of all subsidiaries in which the Holding Company has a controlling interest and the consolidated accounts of variable interest entities (“VIEs”) in which the Holding Company is deemed to be the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.
Unaudited interim financial information —The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. In the opinion of management, all adjustments (including normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the full year.


7


Use of estimates —The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Management evaluates its estimates on an ongoing basis and makes revisions to these estimates and related disclosures as experience develops or new information becomes known. Actual results could differ from those estimates.
Miscellaneous other income —Miscellaneous other income consisted of the following (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Gain on sale of golf club operating property
$

 
$
6,700

Gain on insurance claims

 
1,000

Net periodic pension benefit
10

 
81

Total miscellaneous other income
$
10

 
$
7,781


In January 2018, the Tournament Players Club at Valencia Golf Course was sold for net cash proceeds of $5.7 million , and the buyer assumed of certain liabilities, including certain club membership related liabilities. The Company recognized a gain of $6.7 million as a result of the sale and such gain is included in miscellaneous other income in the condensed consolidated statement of operations for the three months ended March 31, 2018.
Recently issued accounting pronouncements —In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”) which amends the guidance on the impairment of financial instruments, including most debt instruments, trade receivables and loans. ASU No. 2016-13 adds to U.S. GAAP an impairment model known as the current expected credit loss model that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses for instruments measured at amortized cost, resulting in a net presentation of the amount expected to be collected on the financial asset. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact of adopting ASU No. 2016-13 on its consolidated financial statements.
Recently adopted accounting pronouncements —In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU No. 2018-07”) which simplifies the accounting of share-based payments granted to nonemployees for goods and services. Under ASU No. 2018-07, most of the guidance on such payments to nonemployees is aligned with the requirements for share-based payments granted to employees including the determination of the measurement date. The Company adopted ASU No. 2018-07 on January 1, 2019 with no material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,  Leases (Topic 842) (“ASU No. 2016-02”). This ASU generally requires that lessees recognize right-of-use ("ROU") assets and lease liabilities on the balance sheet for operating and financing leases and also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. The FASB has issued multiple clarifications and updates since ASU No. 2016-02 that include, but is not limited to, the ability to elect practical expedients upon transition.
The Company adopted ASU No. 2016-02 and the related ASUs that formed ASC Topic 842, Leases, on January 1, 2019 using the modified retrospective approach. Consequently, comparative prior periods presented in financial statements after adoption will continue to be in accordance with historical U.S. GAAP (Topic 840, Leases) . Upon transition, the Company elected the package of practical expedients, whereby the Company did not reassess whether existing contracts contain leases, the lease classification of existing leases and initial direct costs associated with those leases. Additionally, the Company has excluded recognition of short term leases on the balance sheet and did not separate lease and nonlease components for both lessee and lessor leases. Lease payments for short term


8


leases will continue to be recognized in the consolidated statements of operations on a straight-line basis over the lease term.
The adoption of ASU No. 2016-02 had a material impact on the Company's consolidated balance sheet but did not have a material impact on the Company's consolidated statement of operations and statement of cash flows. The impact of adopting the new guidance primarily relates to (i) the recognition of ROU assets and lease liabilities for operating leases, and (ii) the requirement to provide more robust disclosure on the nature of the Company’s leases, cash flow impacts arising from leases and significant assumptions or judgments used by management to determine whether a contract contains a lease as well as a determination of the discount rate for a lease.
The cumulative effect of the changes made to the Company’s consolidated January 1, 2019 balance sheet from the adoption of the new lease guidance were as follows (in thousands):
 
Balance at December 31, 2018
 
Adjustments due to ASU No. 2016-02
 
Balance at January 1, 2019
ASSETS
 
 
 
 
 
Related party assets
$
61,039

 
$
18,811

 
$
79,850

Other assets
9,179

 
11,425

 
20,604

LIABILITIES
 
 
 
 
 
Accounts payable and other liabilities
161,139

 
11,425

 
172,564

Related party liabilities
178,540

 
18,811

 
197,351




9


3.    REVENUES
The following tables present the Company’s consolidated revenues disaggregated by revenue source and reporting segment (see Note 14) (in thousands):
 
Three Months Ended March 31, 2019
 
Valencia
 
San Francisco
 
Great Park
 
Commercial
 
Total
Land sales
$
64

 
$
221

 
$

 
$

 
$
285

Management services

 
698

 
10,396

 
(31
)
 
11,063

Operating properties
1,253

 
174

 

 

 
1,427

 
1,317

 
1,093

 
10,396

 
(31
)
 
12,775

Operating properties leasing revenues
298

 

 

 

 
298

 
$
1,615

 
$
1,093

 
$
10,396

 
$
(31
)
 
$
13,073


 
Three Months Ended March 31, 2018
 
Valencia
 
San Francisco
 
Great Park
 
Commercial
 
Total
Land sales
$
49

 
$
221

 
$

 
$

 
$
270

Management services

 
1,620

 
10,057

 
90

 
11,767

Operating properties
2,043

 
181

 

 

 
2,224

 
2,092

 
2,022

 
10,057

 
90

 
14,261

Operating properties leasing revenues
706

 

 

 

 
706

 
$
2,798

 
$
2,022

 
$
10,057

 
$
90

 
$
14,967


The opening and closing balances of the Company’s contract assets for the three months ended March 31, 2019 were $50.6 million and $57.3 million , respectively. The increase of $6.7 million between the opening and closing balances of the Company’s contract assets primarily results from a timing difference between the Company’s recognition of revenue earned for the performance of management services and no contractual payments due from the customer during the period. The Company’s opening and closing contract liabilities for the three months ended March 31, 2019 were insignificant.
As of March 31, 2019 , the aggregate amount of the transaction price allocated to the Company’s partially unsatisfied performance obligations associated with the development management agreement with the Great Park Venture was $57.3 million . The Company will recognize this revenue ratably as services are provided over the remaining expected contract term, which terminates in December 2021, unless extended by mutual agreement by both the Company and the Great Park Venture.


10



4.      INVESTMENT IN UNCONSOLIDATED ENTITIES
Great Park Venture
The Great Park Venture has two classes of interests—“Percentage Interests” and “Legacy Interests.” Legacy Interest holders are entitled to receive priority distributions in an aggregate amount equal to $476.0 million and up to an additional $89.0 million from subsequent distributions of cash depending on the performance of the Great Park Venture. The holders of the Percentage Interests will receive all other distributions. The Operating Company owns 37.5% of the Great Park Venture’s Percentage Interests as of March 31, 2019 . The Great Park Venture has made distributions to the holders of Legacy Interests in the aggregate amount of $355.0 million as of March 31, 2019 .
The Great Park Venture is the owner of Great Park Neighborhoods, a mixed-use, master planned community located in Orange County, California. The Company, through the Management Company, manages the planning, development and sale of the Great Park Neighborhoods and supervises the day-to-day affairs of the Great Park Venture. The Great Park Venture is managed by an executive committee of representatives appointed by only the holders of Percentage Interests. The Company does not control the actions of the executive committee.
 
The cost of the Company’s investment in the Great Park Venture is higher than the Company’s underlying equity in the carrying value of net assets of the Great Park Venture (basis difference). The Company’s earnings from the equity method investment are adjusted by amortization and accretion of the basis differences as the assets (mainly inventory) and liabilities that gave rise to the basis difference are sold, settled or amortized.
The following table summarizes the statement of operations of the Great Park Venture for the three months ended March 31, 2019 and 2018 (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Land sale revenues
$
159,163

 
$
407

Cost of land sales
(107,819
)
 

Other costs and expenses
(14,233
)
 
(15,140
)
Net income (loss) of Great Park Venture
$
37,111

 
$
(14,733
)
The Company’s share of net income (loss)
$
13,917

 
$
(5,525
)
Basis difference (amortization) accretion
(4,473
)
 
1,471

Equity in earnings (loss) from Great Park Venture
$
9,444

 
$
(4,054
)



11


The following table summarizes the balance sheet data of the Great Park Venture and the Company’s investment balance as of March 31, 2019 and December 31, 2018 (in thousands):

 
March 31, 2019
 
December 31, 2018
Inventories
$
969,587

 
$
1,059,717

Cash and cash equivalents
181,644

 
60,663

Receivable and other assets
36,103

 
33,836

Total assets
$
1,187,334

 
$
1,154,216

Accounts payable and other liabilities
$
148,816

 
$
152,809

Redeemable Legacy Interests
209,967

 
209,967

Capital (Percentage Interest)
828,551

 
791,440

Total liabilities and capital
$
1,187,334

 
$
1,154,216

The Company’s share of capital in Great Park Venture
$
310,707

 
$
296,790

Unamortized basis difference
124,390

 
128,863

The Company’s investment in the Great Park Venture
$
435,097

 
$
425,653



Gateway Commercial Venture
The Company owns a 75% interest in the Gateway Commercial Venture as of March 31, 2019 . The Gateway Commercial Venture is governed by an executive committee in which the Company is entitled to appoint two individuals. One of the other members of the Gateway Commercial Venture is also entitled to appoint two individuals to the executive committee. The unanimous approval of the executive committee is required for certain matters, which limits the Company’s ability to control the Gateway Commercial Venture. However, the Company is able to exercise significant influence and therefore accounts for its investment in the Gateway Commercial Venture using the equity method. The Company is the manager of the Gateway Commercial Venture, with responsibility to manage and administer its day-to-day affairs and implement a business plan approved by the executive committee.
The Gateway Commercial Venture owns the Five Point Gateway Campus located in Irvine, California and acquired the Five Point Gateway Campus through debt and capital funding. The debt obtained by the Gateway Commercial Venture is non-recourse to the Company     other than in the case of customary “bad act” exceptions or bankruptcy or insolvency events.
The following table summarizes the statement of operations of the Gateway Commercial Venture for the three months ended March 31, 2019 and 2018 (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Rental revenues
$
8,380

 
$
6,705

Rental operating and other expenses
(1,593
)
 
(959
)
Depreciation and amortization
(3,206
)
 
(2,868
)
Interest expense
(4,331
)
 
(2,282
)
Net (loss) income of Gateway Commercial Venture
$
(750
)
 
$
596

Equity in (loss) earnings from Gateway Commercial Venture
$
(562
)
 
$
447



12


The following table summarizes the balance sheet data of the Gateway Commercial Venture and the Company’s investment balance as of March 31, 2019 and December 31, 2018 (in thousands):
 
March 31, 2019
 
December 31, 2018
Real estate and related intangible assets, net
$
463,241

 
$
464,123

Other assets
15,823

 
14,833

Total assets
$
479,064

 
$
478,956

Notes payable, net
$
298,141

 
$
295,440

Other liabilities
40,628

 
40,521

Members’ capital
140,295

 
142,995

Total liabilities and capital
$
479,064

 
$
478,956

The Company’s investment in the Gateway Commercial Venture
$
105,221

 
$
107,246


5.      NONCONTROLLING INTERESTS
The Holding Company’s wholly owned subsidiary is the managing general partner of the Operating Company. At March 31, 2019 , the Holding Company and its wholly owned subsidiary owned approximately 62.4% of the outstanding Class A Common Units and 100% of the outstanding Class B Common Units of the Operating Company. The Holding Company consolidates the financial results of the Operating Company and its subsidiaries, and records a noncontrolling interest for the remaining 37.6% of the outstanding Class A Common Units of the Operating Company.
After a 12 month holding period, holders of Class A Common Units of the Operating Company may exchange their units for, at the Company’s option, either (i) Class A common shares on a one -for-one basis (subject to adjustment in the event of share splits, distributions of shares, warrants or share rights, specified extraordinary distributions and similar events), or (ii) cash in an amount equal to the market value of such shares at the time of exchange. Whether such units are acquired by the Company in exchange for Class A common shares or for cash, if the holder also owns Class B common shares, then an equal number of that holder’s Class B common shares will automatically convert into Class A common shares, at a ratio of 0.0003 Class A common shares for each Class B common share. This exchange right is currently exercisable by all holders of outstanding Class A Common Units of the Operating Company.
 
The San Francisco Venture has three classes of units—Class A, Class B and Class C units. The Operating Company owns all of the outstanding Class B units of the San Francisco Venture. All of the outstanding Class A units are owned by affiliates of Lennar Corporation (“Lennar”) and affiliates of Castlelake, LP (“Castlelake”). The Class A units of the San Francisco Venture are intended to be substantially economically equivalent to the Class A Common Units of the Operating Company. The Class A units of the San Francisco Venture represent noncontrolling interests to the Operating Company.
Holders of Class A units of the San Francisco Venture can redeem their units at any time and receive Class A Common Units of the Operating Company on a one -for-one basis (subject to adjustment in the event of share splits, distributions of shares, warrants or share rights, specified extraordinary distributions and similar events). If a holder requests a redemption of Class A units that would result in the Holding Company’s ownership of the Operating Company falling below 50.1% , the Holding Company has the option of satisfying the redemption with Class A common shares instead. The Company also has the option, at any time, to acquire outstanding Class A units of the San Francisco Venture in exchange for Class A Common Units of the Operating Company. The 12  month holding period for any Class A Common Units of the Operating Company issued in exchange for Class A units of the San Francisco Venture is calculated by including the period that such Class A units of the San Francisco Venture were owned. This exchange right is currently exercisable by substantially all holders of outstanding Class A units of the San Francisco Venture.


13


Concurrent with the termination of the Retail Project (defined in Note 8), the San Francisco Venture issued 436,498 Class A units (and the Company issued 436,498 of its Class B common shares) to, and received a contribution of $5.5 million from, the holders of Class A units of the San Francisco Venture.
On February 13, 2019, the San Francisco Venture issued $25.0 million of new Class C units to an affiliate of Lennar in exchange for a contribution of $25.0 million to the San Francisco Venture. Provided that Lennar completes the construction of a certain number of new homes in Candlestick as contemplated under purchase and sale agreements with the Company, the San Francisco Venture is required to redeem the Class C units if and when the Company receives reimbursements from the Mello-Roos communities facilities district formed for the development, in an aggregate amount equal to 50% of any reimbursements up to a maximum amount of $25.0 million . The San Francisco Venture also maintains the ability to redeem the then outstanding balance of Class C units for cash at any time. Upon a liquidation of the San Francisco Venture, the holders of Class C Units are entitled to a liquidation preference in an aggregate amount equal to 50% of the cumulative amount of reimbursements received, less the aggregate amount previously paid to redeem Class C units. The maximum amount payable by the San Francisco Venture pursuant to redemptions or liquidation of the Class C units is $25.0 million . The holders of Class C units are not entitled to receive any other forms of distributions and are not entitled to any voting rights. In connection with the issuance of the Class C units, the San Francisco Venture agreed to spend $25.0 million on the development of infrastructure and/or parking facilities at the Company’s Candlestick development. At March 31, 2019 , $25.0 million of Class C units are outstanding and is included in redeemable noncontrolling interest on the condensed consolidated balance sheet.
Net income (loss) 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 income (loss) to noncontrolling interests based on the substantive profit sharing provisions of the applicable operating agreements.
With each exchange of Class A Common Units of the Operating Company for Class A common shares, the Holding Company’s percentage ownership interest in the Operating Company and its share of the Operating Company’s cash distributions and profits and losses will increase. Additionally, other issuances of common shares of the Holding Company or common units of the Operating Company results in changes to the noncontrolling interest percentage as well as the total net assets of the Company. As a result, all equity transactions result in an allocation between members’ capital and the noncontrolling interest in the Company’s consolidated balance sheets and statements of capital to account for the changes in the noncontrolling interest ownership percentage as well as the change in total net assets of the Company.
During the three months ended March 31, 2019 , the Holding Company increased its ownership interest in the Operating Company as a result of equity transactions related to the Company’s share-based compensation plan. During the three months ended March 31, 2018 , the Holding Company increased its ownership interest in the Operating Company as a result of equity transactions related to the Company’s share based compensation plan and exchanges of Class A Common Units of the Operating Company for Class A common shares. The carrying amount of the Company’s noncontrolling interest has been adjusted to reflect these changes in ownership interests.
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 tax receivable agreement (“TRA”) related obligation, which was $171.2 million and $169.5 million at March 31, 2019 and December 31, 2018 , 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.


14


The San Francisco Venture is a VIE as the other members of the venture, individually or as a group, are not able to exercise kick-out rights or substantive participating rights. The Company applied the variable interest model and determined that it is the primary beneficiary of the San Francisco Venture and, accordingly, the San Francisco Venture is consolidated in its results. In making that determination, the Company evaluated that the Operating Company has unilateral and unconditional power to make decisions in regards to the activities that significantly impact the economics of the VIE, which are the development of properties, marketing and sale of properties, acquisition of land and other real estate properties and obtaining land ownership or ground lease for the underlying properties to be developed. The Company is determined to have more-than-insignificant economic benefit from the San Francisco Venture because the Operating Company can prevent or cause the San Francisco Venture from making distributions on its units, and the Operating Company would receive 99% of any such distributions (assuming no distributions had been paid on the Class A Common Units of the Operating Company). In addition, the San Francisco Venture is only allowed to make a capital call on the Operating Company and not any other interest holders, which could be a significant financial risk to the Operating Company.
As of March 31, 2019 , the San Francisco Venture had total combined assets of $1,162.3 million , primarily comprised of $1,147.1 million of inventories, $1.5 million in related party assets and $5.1 million in cash and total combined liabilities of $122.8 million , including $102.8 million in related party liabilities.
As of December 31, 2018 , the San Francisco Venture had total combined assets of $1,151.4 million , primarily comprised of $1,137.0 million of inventories and $12.3 million in cash and total combined liabilities of $260.8 million , including $168.9 million in related party liabilities and $65.1 million in notes payable.
Those assets are owned by, and those liabilities are obligations of, the San Francisco Venture, not the Company. The San Francisco Venture is not a guarantor of the Company’s obligations, and the assets held by the San Francisco Venture may only be used as collateral for the San Francisco Venture’s debt. The creditors of the San Francisco Venture do not have recourse to the assets of the Operating Company, as the VIE’s primary beneficiary, or of the Holding Company.
The Company and other partners do not generally have an obligation to make capital contributions to the San Francisco Venture. In addition, there are no liquidity arrangements or agreements to fund capital or purchase assets that could require the Company to provide financial support to the San Francisco Venture. The Company does not guarantee any debt of the San Francisco Venture. 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 March 31, 2019 , FP LP and FPL had combined assets of $785.2 million , primarily comprised of $597.3 million of inventories, $91.6 million of intangibles, $57.1 million in related party assets and $0.1 million in cash, and total combined liabilities of $119.2 million , including $109.7 million in accounts payable and other liabilities and $9.5 million in related party liabilities.
As of December 31, 2018 , FP LP and FPL had combined assets of $745.3 million , primarily comprised of $559.1 million of inventories, $95.9 million of intangibles, $54.3 million in related party assets and $0.1 million in cash, and total combined liabilities of $118.1 million , including $108.6 million in accounts payable and other liabilities and $9.5 million in related party liabilities.
The Company evaluates its primary beneficiary designation on an ongoing basis and assesses the appropriateness of the VIE’s status when events have occurred that would trigger such an analysis. During the three months ended March 31, 2019 and 2018 , respectively, there were no VIEs that were deconsolidated.


15


7.      INTANGIBLE ASSET, NET—RELATED PARTY
The intangible asset relates to the contract value of the incentive compensation provisions of the Management Company’s 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 at the mutual agreement of terms and provisions by both the Company and the Great Park Venture for three additional years and then two additional years. The intangible asset will be amortized over the contract period based on the pattern in which the economic benefits are expected to be received.
The carrying amount and accumulated amortization of the intangible asset as of March 31, 2019 and December 31, 2018 were as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
Gross carrying amount
$
129,705

 
$
129,705

Accumulated amortization
(38,085
)
 
(33,788
)
Net book value
$
91,620

 
$
95,917



For the three months ended March 31, 2019 and 2018 , the Company recorded $4.3 million and $3.7 million of amortization expense, which is included in the cost of management services in the accompanying condensed consolidated statements of operations, as a result of revenue recognition attributable to incentive compensation.
8.     RELATED PARTY TRANSACTIONS
Related party assets and liabilities included in the Company’s condensed consolidated balance sheets as of March 31, 2019 and  December 31, 2018 consisted of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Related Party Assets:
 
 
 
Contract assets (see Note 3)
$
55,465

 
$
49,834

Prepaid rent

 
5,972

Operating lease right-of-use asset (Note 2 and Note 11)
24,389

 

Other
3,190

 
5,233

 
$
83,044

 
$
61,039

Related Party Liabilities:
 
 
 
EB-5 loan reimbursements
$
102,692

 
$
102,692

Contingent consideration—Mall Venture project property

 
64,870

Payable to holders of Management Company’s Class B interests
9,000

 
9,000

Operating lease liability (Note 2 and Note 11)
17,031

 

Other
537

 
1,978

 
$
129,260

 
$
178,540


Contingent Consideration to Class A Members of the San Francisco Venture
Prior to the Company’s acquisition of The San Francisco Venture, The San Francisco Venture completed a separation transaction (the “Separation Transaction”) pursuant to an Amended and Restated Separation and Distribution Agreement (“Separation Agreement”) in which the equity interests in a subsidiary of the San Francisco Venture known as CPHP Development, LLC (“CPHP”) were distributed directly to the members of the San Francisco Venture: (i) an affiliate of Lennar and (ii) an affiliate of Castlelake. The terms of the Separation Agreement included the following:


16


• CPHP was transferred certain acres of land where homes were being built, as well as all responsibility for current and future residential construction on the land;
• Once a final subdivision map was recorded, title to a parking structure parcel at Candlestick (“CP Parking Parcel”) was to be conveyed to CPHP, and CPHP was to assume the obligation to construct the parking structure and certain other improvements at Candlestick;
• CPHP was transferred the membership interest in Candlestick Retail Member, LLC, (“Mall Venture Member”), the entity that had entered into a joint venture (“Mall Venture”) with CAM Candlestick LLC (the “Macerich Member”) to build a fashion outlet retail shopping center (“Retail Project”) above and adjacent to the parking structure that CPHP was to construct on the CP Parking Parcel; and
• Once a final subdivision map was recorded, the San Francisco Venture was to convey to the Mall Venture the property on which the Retail Project was to be built (the “Retail Project Property”).
Under the terms of the Separation Agreement, the San Francisco Venture retained the obligation under the Mall disposition and development agreement to subdivide and convey the Retail Project Property to the Mall Venture and the CP Parking Parcel to CPHP.
In early 2019, after discussions between the Company, CPHP and the Macerich Member, the parties determined not to proceed with the Retail Project. As a result of terminating the Retail Project and agreements related thereto, the obligation of the San Francisco Venture to convey the CP Parking Parcel and the Retail Project Property was terminated, and the San Francisco Venture was also released from certain development obligations, which resulted in a gain $64.9 million for the three months ended March 31, 2019.
Operating lease right-of-use asset and operating lease liability
The Company leases corporate office space at the Five Point Gateway Campus. Upon adoption of ASC Topic 842, Leases (see Note 2 and Note 11) , the Company recognized an operating lease right-of-use asset and operating lease liability pertaining to this related party lease. Existing prepaid rent of $6.0 million was included in the measurement of the operating lease right-of-use asset on January 1, 2019.
9.    NOTES PAYABLE, NET
At March 31, 2019 and December 31, 2018 , notes payable consisted of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
7.875% Senior Notes due 2025
$
500,000

 
$
500,000

Macerich Note

 
65,130

Unamortized debt issuance costs and discount
(7,829
)
 
(8,126
)
 
$
492,171

 
$
557,004


In early 2019, in connection with the termination of the Retail Project (see Note 8), the Company repaid the $65.1 million Macerich Note and settled outstanding accrued interest thereon of approximately $11.1 million .


17


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 and all the holders of Class A units of the San Francisco Venture (as parties to the TRA, the “TRA Parties”). At March 31, 2019 and December 31, 2018 , the Company’s condensed consolidated balance sheets include a liability of $171.2 million and $169.5 million , respectively, for payments expected to be made under certain components of the TRA which the Company deems to be probable and estimable. Management deems a TRA payment related to the benefits expected to be received by the Company under the application of Section 704(c) and Section 743 of the Internal Revenue Code of 1986, as amended, to be probable and estimable when an event occurs that results in the Company measuring the Operating Company’s directly or indirectly held property at fair value in the Company’s consolidated balance sheet or the sale of such property at fair value. Either of these activities are indicators that the difference between the fair market value of the property and the adjusted tax basis has been or will be realized, resulting in special allocations of income, gain, loss or deduction that are likely to reduce the amount of income taxes that the Company would otherwise pay. The Company may record adjustments to TRA liabilities related to properties not currently held at fair value when those properties are recognized or realized at fair value. Furthermore, the Company may record adjustments to TRA liabilities if and when TRA Parties exchange Class A Common Units of the Operating Company for the Company’s Class A common shares or other equity transactions that impact the Holding Company’s ownership in the Operating Company. Changes in the Company’s estimates of the utilization of its deferred tax attributes and tax rates in effect may also result in subsequent adjustments to the amount of TRA liabilities recognized.
The term of the TRA will continue until all such tax benefits under the agreement have been utilized or expired, unless the Company exercises its right to terminate the TRA for an amount based on an agreed value of payments remaining to be made under the agreement. No TRA payments were made during the three months ended March 31, 2019 and 2018 .
11.    LEASES

The Company adopted ASU No. 2016-02 (Note 2) effective on January 1, 2019 on a modified retrospective basis. Consequently, comparative prior periods presented in financial statements after adoption will continue to be in accordance with historical U.S. GAAP (Topic 840, Leases ).
Operating Leases - Lessee
The Company has entered into agreements to lease certain office facilities and equipment under operating leases. Equipment leases are generally short-term leases with terms less than 12 months or subject to month-to-month lease provisions. The Company’s office leases have remaining lease terms of 5 years to 10 years. The Company’s office leases 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 the options in the lease term when it is reasonably certain that it will exercise such options.
The Company determines if an arrangement is a lease at contract inception. Operating ROU assets and operating lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term, which are generally predetermined based on fixed increases within the lease agreements. When the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is derived from assessment of the credit quality of the Company and adjusted to reflect secured borrowing, estimated yield curves and long-term spread adjustments over appropriate tenors.
The components of lease costs were as follows for the three months ended March 31, 2019 (in thousands):
 
 
2019
Operating lease cost
 
$
1,445

Short-term lease cost
 
132




18



Supplemental balance sheet information related to leases as of March 31, 2019 were as follows (in thousands, except lease term in years and discount rate):
 
 
March 31, 2019
Operating lease right-of-use assets ($24,389 related party)
 
$
35,493

Operating lease liabilities ($17,031 related party)
 
$
29,325

Weight average remaining lease term (operating lease)
 
7.7

Weighted average discount rate (operating lease)
 
5.8
%

Operating lease right-of-use asset is included in other assets or related party assets and operating lease liability is included in accounts payable and other liabilities or related party liabilities on the condensed consolidated balance sheet.
As of March 31, 2019 , minimum lease payments to be made under operating leases with initial terms in excess of one year are as follows (in thousands):
Years Ending December 31,
 
Rental
Payments
2019 (excluding the three months ended March 31, 2019)
 
$
3,139

2020
 
4,846

2021
 
5,263

2022
 
5,420

2023
 
5,583

Thereafter
 
13,065

Total lease payments
 
$
37,316

 
 
 
Discount
 
$
7,991

Total operating lease liability
 
$
29,325


As of December 31, 2018, minimum lease payments to be made under operating leases with initial terms in excess of one year under noncancelable leases are as follows (in accordance with the prior period presentation of ASC 840) (in thousands):
Years Ending December 31,
 
Rental
Payments
2019
 
$
5,790

2020
 
4,846

2021
 
5,263

2022
 
5,420

2023
 
5,583

Thereafter
 
13,065

 
 
$
39,967

Operating Leases - Lessor
The Company leases portions of its land to third parties for agriculture or other miscellaneous uses. In most cases, agriculture lease agreements are month-to-month or short-term.


19


12.      COMMITMENTS AND CONTINGENCIES
The Company is subject to the usual obligations associated with entering into contracts for the purchase, development and sale of real estate, which the Company does in the routine conduct of its business. The operations of the Company are conducted through the Operating Company and its subsidiaries, and in some cases, the Holding Company will guarantee the performance of the Operating Company or its subsidiaries.
Valencia Project Approval Settlement
In September 2017, the Company reached a settlement with key national and state environmental and Native American organizations that were petitioners (the “Settling Petitioners”) in various legal challenges to Valencia’s regulatory approvals and permits. As of March 31, 2019 , the Company has a liability balance of $36.5 million associated with certain obligations of the project approval settlement. The Holding Company has provided a guaranty to the Settling Petitioners for monetary payments due from the Company as required under the settlement. As of March 31, 2019 , the remaining estimated maximum potential amount of monetary payments subject to the guaranty was $43.1 million with the final payment due in 2026. The Company did not reach a settlement with two local environmental organizations that have pending challenges to certain Valencia project approvals. See “Legal Proceedings” below.
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 $74.0 million and $73.5 million as of March 31, 2019 and December 31, 2018 , respectively.
Candlestick and The San Francisco Shipyard Disposition and Development Agreement
The San Francisco Venture is a party to a disposition and development agreement with the Successor to the Redevelopment Agency of the City and County of San Francisco (the “San Francisco Agency”) in which the San Francisco Agency has agreed to convey portions of Candlestick and The San Francisco Shipyard to the San Francisco Venture for development. The San Francisco Venture has agreed to reimburse the San Francisco Agency for reasonable costs and expenses actually incurred and paid by the San Francisco Agency in performing its obligations under the disposition and development agreement. The San Francisco Agency can also earn a return of certain profits generated from the development and sale of Candlestick and The San Francisco Shipyard if certain thresholds are met. As of March 31, 2019 the thresholds had not been met.
At March 31, 2019 , the San Francisco Venture had outstanding guarantees benefiting the San Francisco Agency for infrastructure and construction of certain park and open space obligations with aggregate maximum obligations of $197.8 million .
Letters of Credit
At each of March 31, 2019 and December 31, 2018 , the Company had outstanding letters of credit totaling $2.4 million . These letters of credit were issued to secure various development and financial obligations. At each of March 31, 2019 and December 31, 2018 , the Company had restricted cash and certificates of deposit of $1.4 million pledged as collateral under certain of the letters of credit agreements.
Legal Proceedings
Landmark Village/Mission Village
During the pendency of certain prior litigation involving the approval of the original environmental impact reports and related permits for the Landmark Village and Mission Village projects at Valencia, in July 2017, the Los Angeles County Board of Supervisors certified the final additional environmental analyses required as a result of a prior California Supreme Court decision regarding the original greenhouse gas analysis related to the projects and reapproved the Landmark Village and Mission Village projects and related permits. In August 2017, two petitioners, Santa Clarita Organization for Planning and the Environment and Friends of the Santa Clara River (collectively,


20


“Non-Settling Petitioners”), who did not participate in a settlement of prior litigation involving the Company and certain other petitioners, filed a new petition for writ of mandate in the Los Angeles Superior Court. The petition challenged Los Angeles County’s July 2017 approvals of the Mission Village and Landmark Village environmental analyses and the two projects based on claims arising under the California Environmental Quality Act and the California Water Code. The Court held a hearing on the merits of the petition in September 2018. In December 2018, the Superior Court issued its written decision denying the Non-Settling Petitioners’ petition for writ of mandate. Thereafter, in January 2019, the Superior Court entered judgment on the petition for writ of mandate in favor of the County and the Company. In March 2019, the Non-Settling Petitioners filed an appeal of the Superior Court’s ruling.
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., 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. The Company believes that it has meritorious defenses to the allegations in all of these cases and may have insurance and indemnification rights against third parties, including related parties, with respect to these claims. Given the preliminary nature of these claims, the Company cannot predict the outcome of these matters.
Other
Other than the actions outlined above, the Company is also a party to various other claims, legal actions, and complaints arising in the ordinary course of business, the disposition of which, in the Company’s opinion, will not have a material adverse effect on the Company’s consolidated financial statements.
As a significant land owner and developer of unimproved land it is possible that environmental contamination conditions could exist that would require the Company to take corrective action. In the opinion of the Company, such corrective actions, if any, would not have a material adverse effect on the Company’s consolidated financial statements.


21


13.    SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the three months ended March 31, 2019 and 2018 were as follows (in thousands):
 
2019
 
2018
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
Cash paid for interest, all of which was capitalized to inventories
$
12,141

 
$

 
 
 
 
NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Receivable for insurance proceeds on damaged property
$

 
$
630

Recognition of TRA liability
$
1,696

 
$
2,308

Liabilities assumed by buyer in connection with sale of golf course operating property
$

 
$
7,795


Supplemental cash flow information related to leases for the three months ended March 31, 2019 were as follows (in thousands):
 
2019
CASH PAID FOR AMOUNTS INCLUDED IN THE MEASUREMENT OF LEASE LIABILITIES:
 
Operating cash flows from operating leases
$
2,750



The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows for the three months ended March 31, 2019 and 2018 (in thousands):
 
2019
 
2018
Cash and cash equivalents
$
373,292

 
$
778,242

Restricted cash and certificates of deposit
1,738

 
1,467

Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows
$
375,030

 
$
779,709


Amounts included in restricted cash and certificates of deposit represent amounts held as collateral on open letters of credit related to development obligations or because of other contractual obligations of the Company that require the restriction.
14.      SEGMENT REPORTING
As of and for the three months ended March 31, 2019 , the Company’s reportable segments consist of:
• Valencia (formerly Newhall)—includes the community of Valencia (formerly known as Newhall Ranch) planned for development in northern Los Angeles County, California. The Valencia segment derives revenues from the sale of residential and commercial land sites to homebuilders, commercial developers and commercial buyers in addition to ancillary operations of operating properties.
• San Francisco—includes the Candlestick and The San Francisco Shipyard communities located on bayfront property in the City of San Francisco, California. The San Francisco segment derives revenues from the sale of residential and commercial land sites to homebuilders, commercial developers and commercial buyers in addition to management services provided to affiliates of a related party.
• Great Park—includes the Great Park Neighborhoods being developed adjacent to and around the Orange County Great Park, a metropolitan park under construction in Orange County, California. This segment also includes management services provided by the Management Company to the Great Park Venture, the owner of the Great Park Neighborhoods. As of March 31, 2019 , the Company had a 37.5% Percentage Interest in


22


the Great Park Venture and accounted for the investment under the equity method. The reported segment information for the Great Park segment includes the results of 100% of the Great Park Venture at the historical basis of the venture, which did not apply push down accounting at acquisition date. The Great Park segment derives revenues from the sale of residential and commercial land sites to homebuilders, commercial developers and commercial buyers, and management services provided by the Company to the Great Park Venture.
• Commercial—includes Five Point Gateway Campus, an office and research and development campus within the Great Park Neighborhoods, consisting of four newly constructed buildings. Two of the four buildings are leased to one tenant under a 20 -year triple net lease which commenced in August 2017. The Company and a subsidiary of Lennar have entered into separate 130 -month full service gross leases to occupy a portion of the other two buildings. This segment also includes property management services provided by the Management Company to the Gateway Commercial Venture, the entity that owns the Five Point Gateway Campus. As of March 31, 2019 , the Company had a 75% interest in the Gateway Commercial Venture and accounted for the investment under the equity method. The reported segment information for the Commercial segment includes the results of 100% of the Gateway Commercial Venture.
  Segment operating results and reconciliations to the Company’s consolidated balances are as follows (in thousands):
 
Revenues
 
Profit (Loss)
 
Three Months Ended March 31,
 
2019
 
2018
 
2019
 
2018
Valencia
$
1,615

 
$
2,798

 
$
(4,084
)
 
$
3,063

San Francisco
1,093

 
2,022

 
61,074

 
(4,763
)
Great Park
169,559

 
10,464

 
40,268

 
(11,366
)
Commercial
8,349

 
6,795

 
(781
)
 
686

Total reportable segments
180,616

 
22,079

 
96,477

 
(12,380
)
Reconciling items:
 
 
 
 
 
 
 
Removal of results of unconsolidated entities—
Great Park Venture (1)
(159,163
)
 
(407
)
 
(37,111
)
 
14,733

Gateway Commercial Venture (1)
(8,380
)
 
(6,705
)
 
750

 
(596
)
Add equity in earnings (losses) from unconsolidated entities—
Great Park Venture

 

 
9,444

 
(4,054
)
Gateway Commercial Venture

 

 
(562
)
 
447

Corporate and unallocated (3)

 

 
(16,265
)
 
(12,447
)
Total consolidated balances
$
13,073

 
$
14,967

 
$
52,733

 
$
(14,297
)



23


Segment assets and reconciliations to the Company’s consolidated balances are as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
Valencia
$
637,494

 
$
596,222

San Francisco
1,162,275

 
1,151,372

Great Park
1,338,117

 
1,303,362

Commercial
479,130

 
479,662

Total reportable segments
3,617,016

 
3,530,618

Reconciling items:
 
 
 
Removal of unconsolidated balances of Great Park Venture (1)
(1,187,334
)
 
(1,154,216
)
Removal of unconsolidated balances of Gateway Commercial Venture (1)
(479,064
)
 
(478,956
)
Other eliminations (2)
(3,165
)
 
(730
)
Add investment balance in Great Park Venture
435,097

 
425,653

Add investment balance in Gateway Commercial Venture
105,221

 
107,246

Corporate and unallocated (3)
397,779

 
494,277

Total consolidated balances
$
2,885,550

 
$
2,923,892


(1) Represents the removal of the Great Park Venture’s and Gateway Commercial Venture’s operating results and balances that are included in the Great Park segment and Commercial segment operating results and balances, respectively, but are not included in the Company’s consolidated results and balances.
(2) Represents intersegment balances that eliminate in consolidation.
(3) Corporate and unallocated activity is primarily comprised of corporate general, and administrative expenses. Corporate and unallocated assets consist of cash and cash equivalents, receivables, and prepaid expenses.
15.      SHARE-BASED COMPENSATION

The Company may grant equity incentive awards to employees, consultants and non-employee directors under the Five Point Holdings, LLC 2016 Incentive Award Plan (the “Incentive Award Plan”). The Incentive Award Plan provides for the grant of share options, restricted shares, restricted share units, performance awards (which include, but are not limited to, cash bonuses), distribution equivalent awards, deferred share awards, share payment awards, share appreciation rights, other incentive awards (which include, but are not limited to, LTIP Unit awards (as defined in the Incentive Award Plan) and performance share awards. The Incentive Award Plan authorized the issuance of up to 8,500,822 Class A common shares of the Holding Company. As of March 31, 2019 , there were 1,795,170 remaining Class A common shares available for future issuance under the Incentive Award Plan.
Under the Incentive Award Plan, the Company has granted restricted share units (“RSUs”) and restricted share awards either fully vested, with service conditions or with service and market performance conditions based on the market price of the Company’s Class A common shares. Awards with a service condition generally vest over a three-year period or in the case of non-employee directors over one year. Awards with a service and market performance condition generally vest at the end of a three-year period. Restricted share awards entitle the holders to non-forfeitable distributions and to vote the underlying Class A common share during the restricted period.
The Company estimates the fair value of restricted share awards with a service condition based on the closing market price of the Company’s Class A common shares on the award’s grant date. Prior to the Company’s IPO, the Company measured the fair value of RSUs and restricted share awards based on the estimated fair value of the Company’s underlying Class A common shares determined using a discounted cash flow analysis. The inputs utilized in the Company’s estimate were selected by the Company based on information available to the Company, including relevant information obtained after the measurement date, as to the assumptions that market participants


24


would make at the measurement date. The grant date fair value of awards with a market condition are determined using a Monte-Carlo approach.
In January 2019, the Company reacquired 242,990 vested RSUs for $1.8 million and 296,391 restricted Class A common shares for $2.3 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.

During the three months ended March 31, 2019 , the Company granted $2.3 million equity incentive awards to employees and non-employee directors. The awards were comprised of restricted share awards with a service condition and restricted share awards or RSU awards with a market condition contingent on the Company’s Class A common shares satisfying certain price targets.
The following table summarizes share-based equity compensation activity for the three months ended March 31, 2019 :
 
Share-Based Awards
(in thousands)
 
Weighted-
Average Grant
Date Fair Value
Nonvested at January 1, 2019
1,893

 
$
15.27

Granted (1)
1,899

 
$
5.09

Forfeited
(4
)
 
$
14.83

Vested
(717
)
 
$
15.20

Nonvested at March 31, 2019
3,071

 
$
9.00


(1) Quantity granted does not include 388 RSUs that vest upon achievement of maximum performance criteria.

Share-based compensation expense was $3.3 million and $3.4 million for the three months ended March 31, 2019 and 2018, respectively. Share-based compensation expense is included in selling, general, and administrative expenses in the accompanying condensed consolidated statements of operations. Approximately $24.5 million of total unrecognized compensation cost related to non-vested awards is expected to be recognized over a weighted–average period of 2.1 years from March 31, 2019 . The estimated fair value at vesting of share-based awards that vested during the three months ended March 31, 2019 was $5.4 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 does not expect to have a minimum required contribution in 2019 and did not make any contributions during the three months ended March 31, 2019 .


25


The components of net periodic benefit for the and three months ended March 31, 2019 and 2018 , are as follows (in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
Net periodic benefit:
 
 
 
Interest cost
$
208

 
$
187

Expected return on plan assets
(253
)
 
(290
)
Amortization of net actuarial loss
35

 
22

Net periodic benefit
$
(10
)
 
$
(81
)

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 March 31, 2019 , the Company recorded a $1.3 million provision for income taxes (after application of a decrease in the Company’s valuation allowance of $7.3 million ) on pre-tax income of $54.0 million . In the three months ended March 31, 2018, the Company recorded no provision or benefit for income taxes (after application of an increase in the Company’s valuation allowance of $1.6 million ) on pretax loss of $14.3 million . The effective tax rates for the three months ended March 31, 2019 and 2018 , differ from the 21% federal statutory rate and applicable state statutory rates primarily due to the Company’s valuation allowance on its book losses and to the pre-tax portion of income and losses that are passed through to the other partners of the Operating Company and the San Francisco Venture. The current quarter’s tax provision 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 has been treated as a discrete event in the current quarter.
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 2014 through 2017 generally remain subject to examination by federal and state tax authorities. The Company is not currently under examination by any tax authority. The Company classifies any interest and penalties related to income taxes assessed by 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,


26


nor has the Company been assessed interest or penalties by any major tax jurisdictions related to any open tax periods.
18.    FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS AND DISCLOSURES
ASC Topic 820, Fair Values Measurement, emphasizes that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. The following hierarchy classifies the inputs used to determine fair value into three levels:
Level 1 —Quoted prices for identical instruments in active markets
Level 2 —Quoted prices for similar instruments in active markets or inputs, other than quoted prices, that are observable for the instrument either directly or indirectly
Level 3 —Significant inputs to the valuation model are unobservable
At each reporting period, the Company evaluates the fair value of its financial instruments. Other than notes payable, net, the carrying amount of the Company’s financial instruments, which includes cash and cash equivalents, restricted cash and certificates of deposit, certain related party assets and liabilities, and accounts payable and other liabilities, approximated the Company’s estimates of fair value at both March 31, 2019 and December 31, 2018 . The fair value of the Company’s notes payable, net, are estimated based on quoted market prices or discounting the expected cash flows based on rates available to the Company (level 2). At March 31, 2019 , the estimated fair value of notes payable, net was $480.0 million compared to a carrying value of $492.2 million . At December 31, 2018 , the estimated fair value of notes payable, net was $550.1 million compared to a carrying value of $557.0 million . During the three months ended March 31, 2019 and 2018 , the Company had no assets that were measured at fair value on a nonrecurring basis.
Contingent consideration is carried at fair value and is remeasured on a recurring basis. At December 31, 2018 , the fair value of the contingent consideration was $64.9 million (level 3) and during the three months ended March 31, 2019 , the contingent consideration was derecognized (see Note 8).
19.      EARNINGS PER SHARE
The Company uses the two-class method in its computation of earnings per share. Pursuant to the terms of the Holding Company’s Second Amended and Restated Limited Liability Company Agreement, the Class A common shares and the Class B common shares are entitled to receive distributions at different rates, with each Class B common share receiving 0.03% of the distributions paid on each Class A common share. Under the two-class method, the Company’s net income available to common shareholders is allocated between the two classes of common shares on a fully-distributed basis and reflects residual net income after amounts attributed to noncontrolling interests. In the event of a net loss, the Company determined that both classes share in the Company’s losses, and they share in the losses using the same mechanism as the distributions. The Company also has restricted share awards and performance restricted share awards (see Note 15) that have a right to non-forfeitable dividends while unvested and are contemplated as participating when the Company is in a net income position. These awards participate in distributions on a basis equivalent to other Class A common shares but do not participate in losses.
No distributions were declared for the three months ended March 31, 2019 and 2018 and the Company operated in a net income position for the three months ended March 31, 2019 and a net loss position for the three months ended March 31, 2018 . 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


27


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.     


28


The following table summarizes the basic and diluted earnings per share calculations for the three months ended March 31, 2019 and 2018 (in thousands, except shares and per share amounts):

 
Three Months Ended
March 31,
 
2019
 
2018
Numerator:
 
 
 
Net income (loss) attributable to the Company
$
23,808

 
$
(5,232
)
Adjustments to net income (loss) attributable to the Company
107

 
58

Net income (loss) attributable to common shareholders
$
23,915

 
$
(5,174
)
Numerator—basic common shares:
 
 
 
Net income (loss) attributable to common shareholders
$
23,915

 
$
(5,174
)
Less: net income allocated to participating securities
$
986

 
$

Numerator for basic net income (loss) available to Class A common shareholders
$
22,921

 
$
(5,172
)
Numerator for basic net income (loss) available to Class B common shareholders
$
8

 
$
(2
)
Numerator—diluted common shares:
 
 
 
Net income (loss) attributable to common shareholders
$
23,915

 
$
(5,174
)
Reallocation of income (loss) to Company upon assumed exchange of units
$
27,289

 
$
(9,123
)
Less: net income allocated to participating securities
$
985

 
$

Numerator for diluted net income (loss) available to Class A common shareholders
$
50,211

 
$
(14,290
)
Numerator for diluted net income (loss) available to Class B common shareholders
$
8

 
$
(7
)
Denominator:
 
 
 
Basic weighted average Class A common shares outstanding
66,210,916

 
63,367,419

Diluted weighted average Class A common shares outstanding
145,296,469

 
144,812,299

Basic weighted average Class B common shares outstanding
79,061,835

 
81,420,455

Diluted weighted average Class B common shares outstanding
79,275,234

 
81,420,455

Basic income (loss) per share:
 
 
 
Class A common shares
$
0.35

 
$
(0.08
)
Class B common shares
$
0.00

 
$
(0.00
)
Diluted income (loss) per share:
 
 
 
Class A common shares
$
0.35

 
$
(0.10
)
Class B common shares
$
0.00

 
$
(0.00
)
 
 
 
 
Anti-dilutive potential RSUs
36,289

 
72,579

Anti-dilutive potential Performance RSUs
388,155

 

Anti-dilutive potential Restricted Shares (weighted average)

 
1,676,046

Anti-dilutive potential Class A common shares (weighted average)

 

Anti-dilutive potential Class B common shares (weighted average)

 
2,917,827




29


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 $3.4 million at both March 31, 2019 and December 31, 2018 , net of tax benefits of $0.9 million and $0.9 million , respectively. At both March 31, 2019 and December 31, 2018 , the Company held a full valuation allowance related to the accumulated tax benefits. Accumulated other comprehensive loss of $2.0 million and $2.1 million is included in noncontrolling interests at March 31, 2019 and December 31, 2018 , respectively. Net actuarial gains or losses are re-determined annually or upon remeasurement events and principally arise from changes in the rate used to discount benefit obligations and differences between expected and actual returns on plan assets. Reclassifications from accumulated other comprehensive loss to net loss related to amortization of net actuarial losses were approximately $22,000 and $13,000 , net of taxes, for the three months ended March 31, 2019 and 2018 , respectively, and are included in other miscellaneous income in the accompanying condensed consolidated statements of operations.


30


ITEM 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read in conjunction with our condensed consolidated financial statements and related notes included under Part I, Item 1 of this report and our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. “Us,” “we,” and “our” refer to Five Point Holdings, LLC, together with its consolidated subsidiaries. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Actual results could differ materially from those set forth in any forward-looking statements.   See “Cautionary Statement Regarding Forward-Looking Statements.”
Overview
We conduct all of our business in or through our operating company, Five Point Operating Company, LP (the “operating company”). We are, through a wholly owned subsidiary, the sole managing general partner and owned, as of March 31, 2019 , approximately 62.4% of the operating company. The operating company directly or indirectly owns equity interests in: (1) Five Point Land, LLC (“FPL”), which owns The Newhall Land & Farming Company, a California limited partnership, the entity that is developing Valencia (formerly known as Newhall Ranch); (2) The Shipyard Communities, LLC (the “San Francisco Venture”), which is developing Candlestick and The San Francisco Shipyard; (3) Heritage Fields LLC (the “Great Park Venture”), which is developing Great Park Neighborhoods; (4) Five Point Communities, LP and Five Point Communities Management, Inc. (together, the “management company”), which have historically managed the development of Great Park Neighborhoods and Valencia; and (5) Five Point Office Venture Holdings I, LLC (the “Gateway Commercial Venture”), which owns the Five Point Gateway Campus. The operating company consolidates and controls the management of all of these entities except for the Great Park Venture and the Gateway Commercial Venture. The operating company owns a 37.5% percentage interest in the Great Park Venture and a 75% interest in the Gateway Commercial Venture and accounts for its interest in both using the equity method. The management company performs development management services for the Great Park Venture and property management services for the Gateway Commercial Venture.

31


Results of Operations
The timing of our land sale revenues is influenced by several factors, including the sequencing of the planning and development process and market conditions at our communities. As a result, we have historically experienced, and expect to continue to experience, variability in results of operations between comparable periods.
On January 1, 2019, we, the Great Park Venture, and the Gateway Commercial Venture adopted the new lease accounting guidance using the modified retrospective approach. Results for reporting periods beginning after January 1, 2019 are presented under ASC Topic 842, Leases , while prior period results have not been adjusted and continue to be reported in accordance with historical U.S. GAAP (Topic 840, Leases) . See Note 2 and Note 11 to our condensed consolidated financial statements included under Part I, Item 1 of this report for a discussion of recently adopted accounting pronouncements.
The following table summarizes our consolidated historical results of operations for the three months ended March 31, 2019 and 2018 .
 
Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands)
Statement of Operations Data
 
 
 
Revenues
 
 
 
Land sales
$
55

 
$
49

Land sales—related party
230

 
221

Management services—related party
11,063

 
11,767

Operating properties
1,725

 
2,930

Total revenues
13,073

 
14,967

Costs and expenses
 
 
 
Land sales

 
38

Management services
7,616

 
7,089

Operating properties
1,901

 
2,390

Selling, general, and administrative
25,773

 
28,596

Total costs and expenses
35,290

 
38,113

Other income
 
 
 
Adjustment to payable pursuant to tax receivable agreement

 
1,928

Interest income
2,454

 
2,747

Gain on settlement of contingent consideration—related party
64,870

 

Miscellaneous
10

 
7,781

Total other income
67,334

 
12,456

Equity in earnings (loss) from unconsolidated entities
8,882

 
(3,607
)
Income (loss) before income tax (provision) benefit
53,999

 
(14,297
)
Income tax (provision) benefit
(1,266
)
 

Net income (loss)
52,733

 
(14,297
)
Less net income (loss) attributable to noncontrolling interests
28,925

 
(9,065
)
Net income (loss) attributable to the company
$
23,808

 
$
(5,232
)





32



Three Months Ended March 31, 2019 and 2018
Revenues. Revenues decreased by $1.9 million , or 12.7% , to $13.1 million for the three months ended March 31, 2019 , from $15.0 million  for the three months ended March 31, 2018 . We had no land sales and we recognized minimal miscellaneous land sale revenues during the three months ended March 31, 2019 and March 31, 2018 .
Selling, general, and administrative. Selling, general, and administrative expenses decreased by $2.8 million , or 9.9% , to $25.8 million for the three months ended March 31, 2019 , from $28.6 million for the three months ended March 31, 2018 . The decrease is mainly attributable to a decrease in employee related expenses.
Other income. Other income for the three months ended March 31, 2019 consisted primarily of a $64.9 million gain recognized by our San Francisco segment pertaining to the settlement of a contingent consideration liability.
Equity in earnings (loss) from unconsolidated entities. Equity in earnings from unconsolidated entities increased to $8.9 million for the three months ended March 31, 2019 , from a loss of $3.6 million for the three months ended March 31, 2018 . The increase was primarily due to increased revenue from land sales at our Great Park segment.
Income tax benefit. Pre-tax income of $54.0 million for the three months ended March 31, 2019 resulted in a tax provision of $1.3 million. The tax provision was the result of an $8.6 million increase to our deferred tax liability offset by a $7.3 million decrease to our deferred tax asset valuation allowance. We assessed the realization of the net deferred tax asset and the need for a valuation allowance and determined that at March 31, 2019 , it is more likely than not that the net deferred tax asset is not realizable and results in a net deferred tax liability after application of the valuation allowance. Pre-tax losses for the three months ended March 31, 2018 of $14.3 million resulted in a deferred tax benefit and an increase in our net deferred tax asset of $1.6 million, both of which were offset by an increase in our deferred tax asset valuation allowance of $1.6 million. Our effective tax rate, before changes in valuation allowance, increased for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 , primarily due to a slight decrease in the ownership percentage of our noncontrolling interests.
Segment Results and Financial Information
Our four reportable operating segments are Valencia (formerly Newhall), San Francisco, Great Park and Commercial:
Our Valencia segment includes operating results for the Valencia community, agricultural operations, as well as results attributable to other land historically owned by FPL, including 16,000 acres in Ventura County, The Tournament Players Club at Valencia Golf Course (which was sold in January 2018), and 500 acres of remnant commercial, residential and open space land in Los Angeles County.
Our San Francisco segment includes operating results for the Candlestick and The San Francisco Shipyard communities, as well as results attributable to the development management services that we provide to affiliates of Lennar Corporation (“Lennar”) with respect to the Concord community in the San Francisco Bay Area.
Our Great Park segment includes operating results for the Great Park Neighborhoods community and development management services provided by the management company for the Great Park Venture.