# Five Point Holdings, LLC: Form 10-Q for the period ended Mar 31, 2018

- Company: [Five Point Holdings, LLC](/companies/fph.md) (CIK 1574197)
- Form: 10-Q
- Filed: 2018-05-15
- Accepted by EDGAR: May 14, 2018, 19:32 ET
- Period: 2018-03-31
- Accession: 0001574197-18-000008
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1574197/000157419718000008/fph-033118x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1574197/000157419718000008/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-01-01 to 2018-03-31 | $14.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Selling, general and administrative | 3 months, 2018-01-01 to 2018-03-31 | $28.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Income tax | 3 months, 2018-01-01 to 2018-03-31 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-01-01 to 2018-03-31 | −$5.2m | us-gaap:NetIncomeLoss |
| Operating cash flow | 3 months, 2018-01-01 to 2018-03-31 | −$71.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2018-01-01 to 2018-03-31 | $7.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2018-03-31 | $778.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2018-03-31 | $2.97bn | us-gaap:Assets |
| Total liabilities | at 2018-03-31 | $1.06bn | us-gaap:Liabilities |
| Shareholders' equity | at 2018-03-31 | $1.91bn | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 42,688 characters.

### 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, 2017. “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, 2017. 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”). On October 1, 2017, we converted the operating company from a Delaware limited liability company to a Delaware limited partnership. We are, through a wholly owned subsidiary, the sole managing general partner and owned, as of March 31, 2018, approximately 59.4% 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, and is developing Newhall Ranch; (2) The Shipyard Communities, LLC (the “San Francisco Venture”), which is developing The San Francisco Shipyard and Candlestick Point; (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 Newhall Ranch; 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 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.

### 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, 2018, we, the Great Park Venture, and the Gateway Commercial Venture adopted the new revenue recognition accounting guidance using the modified retrospective approach with the cumulative effect recorded as an adjustment to opening capital. The new guidance was applied to contracts not completed at the transition date. Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, *Revenue from Contracts with Customers*, while prior period results have not been adjusted and continue to be reported in accordance with historic accounting under ASC Topic 605, *Revenue Recognition* and other industry specific guidance. See Note 2 and Note 3 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, 2018 and 2017.

*(in thousands)*

| Statement of Operations Data Revenues | Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Land sales | $49 | $465 |
| Land sales—related party | 221 | 84,271 |
| Management services-related party | 11,767 | 5,470 |
| Operating properties | 2,930 | 2,097 |
| Total revenues | 14,967 | 92,303 |
| Costs and expenses |  |  |
| Land sales | 38 | 80,447 |
| Management services | 7,089 | 2,649 |
| Operating properties | 2,390 | 2,280 |
| Selling, general, and administrative | 28,596 | 27,198 |
| Management fees—related party | — | — |
| Total costs and expenses | 38,113 | 112,574 |
| Other income |  |  |
| Adjustment to payable pursuant to tax receivable agreement | 1,928 | — |
| Interest income | 2,747 | — |
| Other income | 7,781 | 23 |
| Total other income | 12,456 | 23 |
| Equity in loss from unconsolidated entities | (3,607) | (2,876) |
| Loss before income tax benefit | (14,297) | (23,124) |
| Income tax benefit | — | — |
| Net loss | (14,297) | (23,124) |
| Less net loss attributable to noncontrolling interests | (9,065) | (15,282) |
| Net loss attributable to the company | $(5,232) | $(7,842) |

36

**Revenues.** Revenues decreased by $77.3 million, or 83.8%, to $15.0 million for the three months ended March 31, 2018, from $92.3 million for the three months ended March 31, 2017. The decrease in revenue was primarily due to a land sale to a related party at our San Francisco segment during the three months ended March 31, 2017. We had no land sales during the three months ended March 31, 2018. Offsetting this decrease was an increase in management services revenue at our Great Park segment as a result of a change to how we account for the recognition of certain variable management fees under the new revenue recognition guidance.

**Cost of land sales.** The higher cost of land sales for the three months ended March 31, 2017 was primarily due to the land sale at our San Francisco segment.

**Cost of management services.** Cost of management services increased by $4.4 million, or 167.6%, to $7.1 million for the three months ended March 31, 2018, from $2.6 million for the three months ended March 31, 2017. The increase was primarily due to intangible asset amortization expense at our Great Park segment.

**Selling, general, and administrative.** Selling, general, and administrative expenses increased by $1.4 million, or 5.1%, to $28.6 million for the three months ended March 31, 2018, from $27.2 million for the three months ended March 31, 2017. This total increase was offset by lower legal expense in 2018 at our Newhall segment. Additionally, share-based compensation decreased by $1.4 million in 2018 compared to 2017 as a result of the completion of the vesting service period in January 2018 for certain awards granted in connection with the formation transactions.

**Other income.** Other income for the three months ended March 31, 2018, consisted primarily of a $6.7 million gain on the sale of an operating asset at our Newhall segment in addition to interest income earned on our cash and cash equivalents during the three month period.

**Equity in loss from unconsolidated entities.** Equity in loss from unconsolidated entities increased to $3.6 million for the three months ended March 31, 2018, from a loss of $2.9 million for the three months ended March 31, 2017. The increase was primarily due to increased management fees and lower land sale revenues recognized at our Great Park segment.

**Income tax benefit.** Pre-tax losses of $14.3 million for the three months ended March 31, 2018 resulted in a deferred tax benefit and an increase in our net deferred tax asset of $1.6 million. However, offsetting the deferred tax benefit and the net deferred tax asset was an increase to our deferred tax asset valuation allowance of $1.6 million. We assessed the realization of the net deferred tax asset and the need for a valuation allowance, based on positive and negative evidence, and determined that at March 31, 2018 it is more likely than not that such net deferred tax assets will not be realized. Pre-tax losses for the three months ended March 31, 2017 of $23.1 million resulted in a deferred tax benefit and an increase in our net deferred tax asset of $3.2 million, both of which were offset by an increase in our deferred tax asset valuation allowance of $3.2 million. Our effective tax rate, before changes in valuation allowance, decreased for the three months ended March 31, 2018 compared to the three months ended March 31, 2017, primarily due to the effect of the federal rate change as a result of the Tax Cuts and Jobs Act of 2017 that was enacted in December 2017.

### Segment Results and Financial Information

Our four reportable operating segments are Newhall, San Francisco, Great Park and Commercial:

- Our Newhall segment includes operating results for the Newhall Ranch community, 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 approximately 500 acres of remnant commercial, residential and open space land in Los Angeles County.
- Our San Francisco segment includes operating results for The San Francisco Shipyard and Candlestick Point community, as well as results attributable to the development management services that we provide to affiliates of Lennar Corporation (“Lennar”) with respect to the Treasure Island community in the City of San Francisco and 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.
- Our Commercial segment includes the operating results of the Five Point Gateway Campus and property management services provided by the management company for the Gateway Commercial Venture.

### Newhall Segment

Our Newhall Ranch property consists of approximately 15,000 acres in northern Los Angeles County. Newhall Ranch is designed to include approximately 21,500 homesites and approximately 11.5 million square feet of commercial space. Newhall Ranch is directly adjacent to our completed, award-winning master-planned community in Valencia, where today approximately 20,000 households reside and approximately 60,000 people work. We are continuing land development activities at Newhall Ranch’s Mission Village, which is approved for up to 4,055 homesites and approximately 1.6 million square feet of commercial development.

The following table summarizes the results of operations of our Newhall segment for the three months ended March 31, 2018 and 2017.

*(in thousands)*

| Statement of Operations Data Revenues | Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Land sales | $49 | $465 |
| Land sales—related party | — | 467 |
| Operating properties | 2,749 | 2,072 |
| Total revenues | 2,798 | 3,004 |
| Costs and expenses |  |  |
| Land sales | 38 | 353 |
| Operating properties | 2,390 | 2,280 |
| Selling, general, and administrative | 4,088 | 7,435 |
| Management fees—related party | — | — |
| Total costs and expenses | 6,516 | 10,068 |
| Other income | 6,781 | 23 |
| Segment income (loss) | $3,063 | $(7,041) |

**Selling, general, and administrative.** Selling, general, and administrative expenses decreased by $3.3 million, or 45.0%, to $4.1 million for the three months ended March 31, 2018, from $7.4 million for the three months ended March 31, 2017. This decrease was primarily due to decreased legal and consulting expenses incurred in 2018 compared to 2017. See Note 12 to our condensed consolidated financial statements included under Part I, Item 1 of this report for a discussion of legal proceedings.

**Other income.** In January 2018, the Tournament Players Club at Valencia Golf Course was sold for net cash proceeds of $5.7 million, and the buyer’s assumption of certain liabilities, including certain club membership related liabilities. The Company recognized a gain of $6.7 million as a result of the sale. We operated the property as an amenity to the segment’s completed Valencia community.

### San Francisco Segment

Located almost equidistant between downtown San Francisco and the San Francisco International Airport, The San Francisco Shipyard and Candlestick Point consists of approximately 800 acres of bayfront property in the City of San Francisco. The San Francisco Shipyard and Candlestick Point is designed to include approximately 12,000 homesites and approximately 4.1 million square feet of commercial space. In 2013, prior to our acquisition, the San Francisco Venture commenced land development and began selling homes in April 2015.

In November 2014, the San Francisco Venture formed a joint venture (the “Mall Venture”) with an affiliate of The Macerich Company to construct an urban retail outlet shopping district at Candlestick Point. Construction of the urban retail outlet shopping district at Candlestick Point commenced in 2015 with the demolition of the Candlestick Park stadium and other infrastructure work. In light of the rapidly evolving retail landscape, we have been evaluating, together with the members of the Mall Venture, the viability of an urban retail outlet at Candlestick Point. We are engaged in infrastructure development at Candlestick Point, however, we are currently exploring potential alternative configurations and/or uses for the site.

In November 2016, San Francisco voters approved an initiative measure, Proposition O, to exempt The San Francisco Shipyard and Candlestick Point from citywide office development growth restrictions. Those growth controls (referred to as Proposition M after the 1986 initiative measure first imposing them) limit the amount of new office construction each year in San Francisco to 950,000 square feet per year, and require each new office development of 25,000 square feet or more to obtain an allocation of office space from the Planning Commission. With passage of Proposition O and the approval to implement the redevelopment plan amendments that the San Francisco Venture is seeking, development at The San Francisco Shipyard and Candlestick Point will not be required to obtain an allocation of office space and will not be subject to the Proposition M annual limitations on office development. This means the full amount of permitted commercial square footage at The San Francisco Shipyard and Candlestick Point can be constructed as we determine, including all at once, even though Proposition M may delay new office developments elsewhere in San Francisco. We are in the process of amending the disposition and development agreement with the City of San Francisco to increase the total amount of commercial use at The San Francisco Shipyard and Candlestick Point by over two million square feet, most of which we anticipate will be for office use. We recently received significant approvals from the Planning Commission, Metropolitan Transportation Authority and the Office of Community Investment and Infrastructure, and we expect to receive final approval for the increased square footage in 2018.

At The San Francisco Shipyard, approximately 408 acres are still owned by the U.S. Navy and will not be conveyed to us until the U.S. Navy satisfactorily completes its finding of suitability to transfer, or “FOST,” process, which involves multiple levels of environmental and governmental investigation, analysis, review, comment and approval. Based on our discussions with the U.S. Navy, we had previously expected the U.S. Navy to deliver this property between 2019 and 2022. However, allegations that a contractor hired by the U.S. Navy misrepresented its sampling results at The San Francisco Shipyard have resulted in data reevaluation, governmental investigations, criminal proceedings related to former employees of the independent contractor, and a determination by the U.S. Navy to undertake additional sampling. As part of the 2018 Congressional spending bill, the U.S. Department of Defense allocated $36 million to help fund resampling efforts at The San Francisco Shipyard. These activities could slow the remaining land transfers from the U.S. Navy, which could in turn delay or impede our future development of such parcels. In addition, a lawsuit was recently filed seeking, among other things, a preliminary injunction to prevent us from undertaking development activities at The San Francisco Shipyard. See Note 12 to our condensed consolidated financial statements included under Part I, Item 1 of this report. Our development plans were designed with the flexibility to adjust for potential land transfer delays, and we have the ability to shift the phasing of our development activities to account for potential delays caused by U.S. Navy retesting.

The following table summarizes the results of operations of our San Francisco segment for the three months ended March 31, 2018 and 2017.

*(in thousands)*

| Statement of Operations Data Revenues | Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Land sales—related party | $221 | $83,804 |
| Operating property | 181 | 25 |
| Management services—related party | 1,620 | 1,396 |
| Total revenues | 2,022 | 85,225 |
| Costs and expenses |  |  |
| Land sales | — | 80,094 |
| Management services | 399 | 113 |
| Selling, general, and administrative | 6,386 | 6,660 |
| Total costs and expenses | 6,785 | 86,867 |
| Segment loss | $(4,763) | $(1,642) |

**Land sales revenue—related party.** Land sales revenue decreased by $83.6 million, or 99.7%, to $0.2 million for the three months ended March 31, 2018, from $83.8 million for the three months ended March 31, 2017. The decrease was primarily due to the recognition of revenues in 2017 from a sale to a related party for real estate within The San Francisco Shipyard and Candlestick Point community. The sale closed in January 2017, resulting in gross proceeds of $91.4 million on 3.6 acres planned for construction of up to 390 for-sale homesites. In transitioning to the new revenue recognition guidance, we determined that we transferred control of the land in connection with the 2017 land sale at the time of the sale, and we recognized $9.9 million in deferred revenues, and the associated inventory relief, directly to capital on January 1, 2018. Additionally, under the new revenue guidance, the recognition of variable consideration from land sale contracts in the form of revenue or profit participation and marketing fees received from homebuilders, which historically have been recognized as revenue in the period in which the contingencies associated with the amount and timing of the consideration were resolved, is now recognized at the time of land sale in an amount we expect to be entitled to receive in revenue. At the transition date, our San Francisco segment recognized contract assets of $7.0 million representing such variable consideration. The cost of land sales for the three months ended March 31, 2017 is primarily related to the land sale to the related party.

### Great Park Segment

We have a 37.5% percentage interest in the Great Park Venture, and we account for our investment using the equity method of accounting. We have a controlling interest in the management company, which performs development management services at Great Park Neighborhoods. We do not include the Great Park Venture as a consolidated subsidiary in our consolidated financial statements. However, because of the relationship between the management company and the Great Park Venture, we assess our investment in the Great Park Venture based on the financial information for the Great Park Venture in its entirety, and not just our equity interest in it. As a result, our Great Park segment consists of the operations of both the Great Park Venture and the development management services provided by the management company at the Great Park Venture.

Great Park Neighborhoods consists of approximately 2,100 acres in Orange County and is being built around the approximately 1,300 acre Orange County Great Park, a metropolitan public park that is under construction. Great Park Neighborhoods is designed to include approximately 9,500 homesites and approximately 4.9 million square feet of commercial space.

Interests in the Great Park Venture are either “percentage interests” or “legacy interests.” Holders of the legacy interests are entitled to receive priority distributions in an amount up to $565.0 million, and holders of percentage interests are entitled to all other distributions. As of April 30, 2018, aggregate distributions to holders of legacy interests totaled $355.0 million. See Note 5 to our condensed consolidated financial statements included under Part I, Item 1 of this report for additional discussion of distribution priorities at the Great Park Venture.

In May 2018, the Great Park Venture sold approximately 33 acres of land at the Great Park Neighborhoods for $166.0 million with approval to build 536 homes.

The following table summarizes the results of operations of our Great Park segment for the three months ended March 31, 2018 and 2017.

*(in thousands)*

| Statement of Operations Data Revenues | Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Land sales | $256 | $1,866 |
| Land sales—related party | 151 | 2,807 |
| Management services—related party | 10,057 | 4,074 |
| Total revenues | 10,464 | 8,747 |
| Costs and expenses |  |  |
| Land sales | — | 2,553 |
| Management services | 6,690 | 2,535 |
| Selling, general, and administrative | 8,487 | 5,669 |
| Management fees—related party | 7,632 | 1,539 |
| Total costs and expenses | 22,809 | 12,296 |
| Interest income | 979 | — |
| Segment loss | $(11,366) | $(3,549) |

**Land sale revenues.** There were no land sales that closed during the three months ended March 31, 2018 or 2017. In transitioning to the new revenue recognition guidance, the Great Park Venture recognized $18.4 million in deferred revenues associated with prior period land sales in which the Great Park Venture’s performance obligation was completed and consideration had been received but deferred under the historical guidance. Additionally, the Great Park Venture recognized a contract asset upon transition of $14.2 million representing variable consideration in the form of marketing fees that the Great Park Venture expects to be entitled to receive upon homebuilders completing sales of homes at the Great Park Neighborhoods. Under the historical revenue guidance, the Great Park Venture recognized variable consideration in the period that the contingency associated with the consideration was resolved. During the three months ended March 31, 2018, land sale revenues included changes in estimates of variable consideration from those amounts previously recorded, reflecting the Great Park Venture’s transition to the new revenue guidance.

**Management services revenue—related party.** The management company has an agreement to provide development management services to the Great Park Venture. Under this agreement, we receive a base management fee, reimbursement for certain defined project team costs and the right to receive certain variable incentive compensation upon the achievement of certain milestones. The new revenue guidance primarily impacted our recognition of variable incentive compensation consideration. Previously, revenue was recognized when contingencies associated with the amount and timing of the consideration were resolved. Under the new guidance, estimates of the amount of variable consideration that we expect to be entitled to receive as revenue are recognized over time as management services are provided. Upon transitioning to the new guidance, we adjusted our opening balance sheet on January 1, 2018 to reflect a contract asset of $29.4 million representing the cumulative amount of consideration we expect to be entitled to receive for services provided through the transition date. We include this contract asset in related party assets on our consolidated balance sheet. During the three months ended March 31, 2018, we recognized $5.5 million in revenues and an increase to our contract asset attributed to the incentive compensation provisions of the development management agreement with the Great Park Venture for services provided during the period.

**Management services costs and expenses.** Included within management services costs and expenses are general and administrative costs and expenses incurred directly by the management company’s project team that is managing the development of the Great Park Neighborhoods. We also include amortization expense, if any, related to the intangible asset attributed to the incentive compensation provisions of the development management agreement with the Great Park Venture. Corporate and non-project team salaries and overhead are not allocated to management services costs and expenses and are reported in selling, general, and administrative costs in the consolidated statement of operations. During the three months ended March 31, 2018, management services costs and expenses increased compared to 2017 primarily as a result of amortization expense related to the intangible asset.

**Selling, general, and administrative.** Selling, general, and administrative expenses are comprised of the Great Park Venture’s marketing related costs and project team and other administrative costs that are reimbursed to the management company per the terms of the development management agreement. Selling, general, and administrative costs increased by $2.8 million, to $8.5 million for the three months ended March 31, 2018, from $5.7 million for the three months ended March 31, 2017. The higher expense during the three months ended March 31, 2018 is primarily due to increased marketing activities in connection with active neighborhoods at the Great Park Neighborhoods.

**Management fees—related party.** Management fees increased by $6.1 million, to $7.6 million for the three months ended March 31, 2018, from $1.5 million for the three months ended March 31, 2017. Management fees incurred by the Great Park Venture are comprised of base development management fees and incentive compensation fees. The increase is primarily due to the three months ended March 31, 2018 including $6.0 million of accrued incentive compensation expense in addition to the base development management fee. Only base development management fees were incurred during the three months ended March 31, 2017.

The table below reconciles the Great Park segment results to the equity in loss from our investment in the Great Park Venture that is reflected in the condensed consolidated statements of operations for the three months ended March 31, 2018 and 2017.

*(in thousands)*

|  | Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Segment net loss from operations | $(11,366) | $(3,549) |
| Less net income of management company attributed to the Great Park segment | 3,367 | 1,539 |
| Net loss of Great Park Venture | (14,733) | (5,088) |
| The Company’s share of net loss of the Great Park Venture | (5,525) | (1,908) |
| Basis difference accretion (amortization) | 1,471 | (968) |
| Equity in loss in Great Park Venture | $(4,054) | $(2,876) |

### Commercial Segment

In August 2017, the Gateway Commercial Venture, in which we own a 75% interest, acquired the Five Point Gateway Campus, a commercial office campus consisting of approximately 73 acres of land in the Great Park Neighborhoods containing four newly constructed buildings, two of which were leased back by the seller, Broadcom Limited (together with its subsidiaries, “Broadcom”). The Five Point Gateway Campus includes approximately one million square feet planned for research and development and office space in the four buildings, which are designed to accommodate thousands of employees. Broadcom will remain the largest tenant, leasing approximately 660,000 square feet of research and development space pursuant to a 20-year triple net lease.

We do not include the Gateway Commercial Venture as a consolidated subsidiary in our consolidated financial statements. However, as a result of our 75% economic interest and our role as manager, we assess our investment in the Gateway Commercial Venture based on the financial information of the Gateway Commercial Venture in its entirety, and we include the Gateway Commercial Venture’s financial results within the Commercial segment. Additionally, the management company has been engaged by the Gateway Commercial Venture to provide property management services to the Five Point Gateway Campus. We include the management company’s results of operations related to these property management services within the Commercial segment.

The following table summarizes the results of operations of our Commercial segment for the three months ended March 31, 2018.

*(in thousands)*

| Statement of Operations Data Revenues | Three Months Ended March 31, 2018 |
| --- | ---: |
| Rental and related income | $6,705 |
| Property management fees | 90 |
| Total revenues | 6,795 |
| Costs and expenses |  |
| Rental operating expenses | 839 |
| Other expenses | 5,270 |
| Total costs and expenses | 6,109 |
| Segment income | $686 |

For the three months ended March 31, 2018, our Commercial segment recognized $6.8 million in revenues from the triple net lease with Broadcom and our property management services. Expenses were mostly comprised of depreciation, amortization and interest expense totaling $5.1 million for the three months ended March 31, 2018. Our segment net income was $0.7 million and our share of equity in income from the Gateway Commercial Venture totaled $0.4 million for the three months ended March 31, 2018.

The table below reconciles the Commercial segment results to the equity in earnings from our investment in the Gateway Commercial Venture that is reflected in the condensed consolidated statements of operations for the three months ended March 31, 2018.

*(in thousands)*

|  | Three Months Ended March 31, 2018 |
| --- | ---: |
| Segment net income from operations | $686 |
| Less net income of management company attributed to the Commercial segment | 90 |
| Net income of Gateway Commercial Venture | 596 |
| The Company’s share of net income of the Gateway Commercial Venture | $447 |

### Financial Condition, Liquidity and Capital Resources

As of March 31, 2018, we had $778.2 million of consolidated cash and cash equivalents, compared to $848.5 million at December 31, 2017. As of March 31, 2018, no funds have been drawn on the Company’s $125.0 million revolving credit facility. However, letters of credit of $1.0 million are issued and outstanding under the revolving credit facility, thus reducing the available capacity to $124.0 million.

Our short-term cash needs consist primarily of general and administrative expenses and development expenditures at Newhall Ranch and The San Francisco Shipyard and Candlestick Point. The development stages of our master-planned communities continue to require significant cash outlays on both a short-term and long-term basis while land sales at Newhall Ranch and The San Francisco Shipyard and Candlestick Point are not expected to generate significant liquidity within the next 12 months. We expect to meet our cash requirements for at least the next 12 months with available cash, noncore land sales and collection of management fees under our various management agreements.

Our long-term cash needs relate primarily to future land development expenditures and investments in or vertical construction costs for properties that we may acquire or develop for our income-producing portfolio. We budget our cash development costs on an annual basis. Budgeted amounts are subject to change due to delays or accelerations in construction or regulatory approvals, changes in inflation rates and other increases (or decreases) in costs. We may also modify our development plans or change the sequencing of our communities in response to changing economic conditions, consumer preferences and other factors, which could have a material impact on the timing and amount of our development costs. Budgeted amounts are expected to be funded through a combination of available cash, cash flows from our communities and reimbursements from public financing, including community facilities districts, tax increment financing and local, state and federal grants. Cash flows from our communities may occur in uneven patterns as cash is primarily generated by land sales which can occur at various points over the life cycle of our communities.

We currently expect to have sufficient capital to fund the horizontal development of our communities in accordance with our development plan for several years. However, we may experience cost increases, our plans may change or circumstances may arise that result in our needing additional capital to execute our development plan. In addition, the level of capital expenditures in any given year may vary due to, among other things, the number of communities or neighborhoods under development and the number of planned deliveries, which may vary based on market conditions. We may seek to raise additional capital by accessing the debt or equity capital markets or with one or more revolving or term loan facilities or other public or private financing alternatives. These financings may not be available on attractive terms, or at all.

### Summary of Cash Flows

The following table outlines the primary components of our cash flows (in thousands):

|  | Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Operating activities | $(71,153) | $23,323 |
| Investing activities | 6,048 | 4,705 |
| Financing activities | (5,131) | (7,652) |

**Cash Flows from Operating Activities.** Cash flows from operating activities are primarily comprised of cash inflows from land sales, management services and operating property results. Cash outflows are comprised primarily of cash outlays for land development costs, employee compensation, and selling, general, and administration costs. Our operating cash flows vary significantly each year due to the timing of land sales and the development efforts related to our master-planned communities.

Net cash used in operating activities increased by $94.5 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 due to $91.2 million in net proceeds received upon closing escrow for the land sale at the San Francisco Venture offsetting net cash used during the three months ended March 31, 2017.

**Cash Flows from Investing Activities.** Net cash provided by investing activities was $6.0 million for the three months ended March 31, 2018, an increase of $1.3 million compared with net cash provided by investing activities of $4.7 million for the three months ended March 31, 2017.

For the three months ended March 31, 2018, net proceeds from the sale of the Newhall segment’s golf course operating property was $5.7 million. During the three months ended March 31, 2017 we used $25.2 million to purchase investments in marketable debt securities and received proceeds of $30.0 million from the prior owners of the San Francisco Venture under the final installment of the $120.0 million capital commitment given in connection with the formation transactions.

**Cash Flows from Financing Activities.** Net cash used in financing activities was $5.1 million for the three months ended March 31, 2018, a decrease of $2.5 million compared to $7.7 million net cash used in financing activities for the three months ended March 31, 2017. We used $5.1 million and $6.5 million during the three months ended March 31, 2018 and 2017, respectively, to net settle certain share-based compensation awards for tax withholding purposes. During the three months ended March 31, 2017, we paid $1.1 million in equity offering and financing costs associated with the initial public offering and our unsecured revolving credit facility.

### Changes in Capital Structure

During the three months ended March 31, 2018, we increased our ownership percentage in the operating company to 59.4%, primarily due to the operating company issuing us additional class A common units in connection with our issuance of class A common shares under our share-based compensation plan. Additionally, we issued approximately 45,000 class A common shares in exchange for an equal number of class A common units of the operating company tendered for redemption.

### Contractual Obligations and Commitments

Our contractual obligations have not changed materially from those reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

We are committed under various letters of credit (“LOCs”) to perform certain development activities and provide certain guarantees in the normal course of business. Outstanding LOCs totaled $2.4 million at March 31, 2018 and December 31, 2017. At each of March 31, 2018 and December 31, 2017, we had $1.4 million in restricted cash and certificates of deposit securing certain of our LOCs. Additionally, under our revolving credit facility, we are able to utilize undrawn capacity to support the issuance of LOCs. As of March 31, 2018, we were using approximately $1.0 million in capacity under the revolving credit facility to support LOCs. Additionally, in the ordinary course of business and as a part of the entitlement and development process, we are required to provide performance bonds to ensure completion of certain development obligations. We had outstanding performance bonds of $73.9 million as of March 31, 2018.

As required by the disposition and development agreements (the “DDAs”) between the San Francisco Venture and the San Francisco Agency, the San Francisco Venture has given two guarantees to the San Francisco Agency, limited to a maximum of $5.5 million per guaranty. Lennar has agreed to replace one of the guarantees provided by the San Francisco Venture and to indemnify the San Francisco Venture for any losses incurred with respect to the guarantee. Pursuant to the DDAs, the San Francisco Venture also provided the San Francisco Agency with a guaranty of infrastructure obligations with a maximum obligation of $21.4 million in April 2014, and an additional guaranty of infrastructure obligations with a maximum obligation of $8.1 million in March 2016. The Company provided the San Francisco Agency with a guaranty related to construction of certain park and open space obligations with a maximum obligation of $83.7 million in June 2017 and an additional guaranty of infrastructure obligations with a maximum obligation of $79.1 million in September 2017.

### Critical Accounting Policies

Other than with respect to revenue recognition, there have been no significant changes to our critical accounting policies during the three months ended March 31, 2018 as compared to those disclosed in our Annual

Report on Form 10-K for the fiscal year ended December 31, 2017. The adoption of the new revenue guidance on January 1, 2018 has increased the significance of judgments related to the amount of variable consideration we include in the transaction price for contracts with customers and the amount we recognize as revenue before the contingency is resolved. In addition to the information below, see Note 2 and Note 3 to our condensed consolidated financial statements included under Part I, Item 1 of this report for additional information on revenue recognition.

#### Land Sales

Revenues from land sales are recognized when control of the land passes to our customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange. The transaction price typically contains fixed and variable components. Some of our residential homesite sale agreements contain a profit participation provision whereby we receive from homebuilders a portion of profit after the builder has received an agreed-upon margin. If the project profitability falls short of the participation threshold, we receive no additional revenues and have no financial obligation to the builder. In most contracts, at the time of the land sale we expect to constrain our estimate of profit participation, if any, as there are significant factors outside our control that will impact if participation thresholds will be met. At each reporting period, we evaluate the contract to determine any changes in our estimate. In addition, some residential homesite sale agreements contain a provision requiring the homebuilder to pay a marketing fee per residence sold, as a percentage of the home sale price. We estimate such fees and include an amount we expect to be entitled to receive in the transaction price.

#### Management Services-Incentive Compensation Revenue

Our management agreements may contain incentive compensation fee provisions contingent on the performance of our customer. In making estimates of incentive compensation we expect to be entitled to receive in exchange for providing management services, we make significant assumptions and judgments in evaluating the factors that may determine the amount of consideration we will ultimately receive. In doing so, we typically utilize cash flow projections. These cash flows are significantly affected by estimates and assumptions related to market supply and demand, the local economy, projected pace of sales of homesites, pricing and price appreciation over the estimated selling period, the length of the estimated development and selling periods, remaining development, general, and administrative costs, and other factors. We recognize incentive compensation revenue from management services evenly over the expected contract term. When changes in our estimates and assumptions occur, our estimate of the amount of incentive compensation we expect to be entitled to receive may change, resulting in a cumulative catch-up being recorded in the period of the change.

### Recently Issued Accounting Pronouncements and Developments

See Note 2 to our condensed consolidated financial statements included under Part I, Item 1 of this report for a discussion of new accounting pronouncements applicable to the Company.

### Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of March 31, 2018.

### Seasonality

Our business and results of operations are not materially impacted by seasonality.

## Market risk

As filed, 1,405 characters.

Market risk is the risk of loss from adverse changes in market prices and interest rates. Our future earnings, cash flows and fair values relative to financial instruments are dependent upon prevailing market interest rates. Our primary market risk results from our indebtedness, which bears interest at both fixed and floating rates. Although we do not currently do so, we may in the future manage our market risk on floating rate debt by entering into swap arrangements to in effect fix the rate on all or a portion of the debt for varying periods up to maturity. This would, in turn, reduce the risks of variability of cash flows created by floating rate debt and mitigate the risk of increases in interest rates. Our objective when undertaking such arrangements would be to reduce our floating rate exposure, as we do not plan to enter into hedging arrangements for speculative purposes.

As of March 31, 2018, we had outstanding consolidated indebtedness of $561.1 million, $65.1 million of which bears interest based on floating interest rates. If the relevant rates used to determine the interest rates on this floating rate indebtedness were to increase (or decrease) by 100 basis points, the interest expense would increase (or decrease) by approximately $0.7 million annually.

We have not entered into any transactions using derivative financial instruments or derivative commodity instruments.

## Controls and procedures

As filed, 1,459 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the supervision and participation of our President and Chief Executive Officer and our Vice President and Chief Financial Officer (the "Certifying Officers"), has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2018. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management, including our Certifying Officers and our Board of Directors, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, the Certifying Officers concluded that our disclosure controls and procedures were effective as of March 31, 2018.

### Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 148 characters.

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.

Filed May 15, 2018.
Source: SEC EDGAR, the filing index for accession 0001574197-18-000008. Last ingested by Listed: Nov 9, 2026, 23:40 ET. No prices; not investment advice.