5 Level Holdings, LLC (FPH) Q1 2024 Earnings Name Transcript

5 Level Holdings, LLC (NYSE:FPH) Q1 2024 Earnings Convention Name April 18, 2024 5:00 PM ET

Firm Individuals

Dan Hedigan – CEO
Kim Tobler – CFO
Stuart Miller – Govt Chairman

Convention Name Individuals

Alan Ratner – Zelman & Associates
Myron Kaplan – Personal Investor

Operator

Greetings, and welcome to the 5 Level Holdings, LLC First Quarter 2024 Convention Name. As a reminder, this name is being recorded. At this time’s name could embody forward-looking statements concerning 5 Level’s enterprise, monetary situations, operations, money stream, technique and prospects.

Ahead-looking statements characterize 5 Level’s estimates on the information of this convention name and are usually not supposed to provide any assurance to precise future outcomes. As a result of forward-looking statements relate to issues that haven’t but occurred, these statements are inherently topic to dangers and uncertainties.

Many components might have an effect on future outcomes and will trigger 5 Level’s precise actions or outcomes to vary materially from the actions and outcomes anticipated in forward-looking statements. These components embody these described in right now’s press launch and 5 Level’s SEC filings, together with these within the Danger Components part of 5 Level’s most up-to-date annual report on Type 10-Ok filed with the SEC. Please observe that 5 Level assumes no obligation to replace any forward-looking statements.

Now, I want to flip the decision over to Dan Hedigan, Chief Govt Officer.

Dan Hedigan

Thanks. Good afternoon, and thanks for becoming a member of our name. I’ve with me right now Kim Tobler, our Chief Monetary Officer; Mike Alvarado, our Chief Working Officer and Chief Authorized Officer; and Leo Kij, our Senior Vice President of Finance and Reporting. Stuart Miller, our Govt Chairman, is becoming a member of us remotely.

On right now’s name, I will replace you on our Q1 outcomes, on our workforce’s centered through the quarter and the steps we’re taking to implement our strategic priorities. Subsequent, Kim will give an outline of the corporate’s monetary efficiency and situation with some restricted steerage for the second quarter and the complete yr. We are going to then open the road for inquiries to our administration workforce.

So let’s start. I’m very happy to report one other robust quarterly efficiency for 5 Level as we proceed to deal with fortifying our stability sheet, controlling our bills and punctiliously managing our capital spend to match near-term revenues. Accordingly, we’re completely happy to report a worthwhile first quarter, per our expectations as we began the yr.

Our internet earnings for the quarter was $6.1 million, which displays the energy of the builder curiosity in our two lively communities. Particularly, in February, we offered 11.6 acres of land on the Nice Park for $6.4 million per acre for a complete gross sales worth of $74.6 million with a 60% revenue margin. This sale contributed to the $17.7 million of fairness and earnings from unconsolidated investments for the quarter.

Moreover, per our deal with holding down prices, we held our SG&A to $12.9 million, which is 6.5% lower than the primary quarter of final yr. We achieved these outcomes whereas there stays uncertainty round rates of interest and inflation. We have been managing our enterprise with the idea that rates of interest stay elevated for longer than initially anticipated. Whereas rates of interest are related in our chronically undersupplied California market, shortages of entitled land and present dwelling stock proceed to drive robust demand from builders.

Transferring to our stability sheet. In reference to the extremely profitable alternate of our senior notes, we paid down our debt by $100 million, leading to an improved debt to whole capitalization ratio of 20.9%. We ended the quarter in a wholesome liquidity place with $233 million in money and $0 drawn on our $125 million revolver, giving us whole liquidity of $358 million. Kim will cowl extra particulars concerning our financials throughout his feedback.

Additional validating our constant progress, I am completely happy to report that S&P International has raised our issuer credit standing to B- and upgraded our outlook to steady. S&P additionally raised the rankings on our senior unsecured notes to B. These upgrades mirror the workforce’s onerous work in persevering with to deal with our three essential priorities: producing income and constructive money stream; controlling SG&A prices; and managing capital spend to match near-term income alternatives.

Additionally reflecting the super progress that we’ve got made as a workforce, I might prefer to parenthetically observe that Mike Alvarado has added new duties as our Chief Working Officer. The addition of those duties is a recognition of the expanded function Mike has already been taking part in for 5 Level and a big contribution to our general operational and strategic progress.

Mike has been intimately concerned with the corporate’s property and operations going again almost 20 years. And as an expanded function, Mike will probably be centered on, amongst different issues, guaranteeing that we execute effectively on our marketing strategy and overseeing entitlement efforts throughout our communities. I’m assured Mike will see continued success on this new function that his management will assist drive shareholder worth. Congratulations, Mike.

Let me now increase a bit on normal market situations. However final week’s financial information on inflation, situations in our markets stay comparatively robust for homebuilders. The continued lack of present dwelling stock, coupled with low unemployment and pretty robust client confidence has helped maintain robust demand for our land and our communities. The restricted think about demand stays affordability, which is pushed largely by the influence of upper rates of interest and cussed inflation.

Whereas rates of interest have been fluctuating, builders have quite a lot of incentive buildings to assist new dwelling gross sales. With the flexibility to regulate these incentives in response to rate of interest actions, homebuilders have been uniquely in a position to seize and maintain demand to permit new dwelling gross sales to proceed. Within the early months of 2024, we’ve got seen robust builder curiosity in our residential land choices, in addition to sustained new dwelling demand and we imagine the demand for entitled land in our communities will proceed to exceed provide.

On the business aspect of our enterprise, as we’ve got famous earlier than, capital markets have slowed for speculative business improvement, however we’re nonetheless seeing curiosity in each builders and customers. We’re at the moment viewing person gives on sure business websites, and we count on this curiosity will proceed to assist business demand. The regional housing wants evaluation, RHNA, course of that’s ongoing in California may give us optionality to think about multi-family or for-sale housing on sure of our business websites.

Let me now give you some updates on our communities, beginning first with the Nice Park Neighborhoods. As a reminder, the Nice Park is probably the most mature of our communities and its ongoing contribution to our monetary outcomes displays the advantages that we and our Nice Park Enterprise companions are receiving from the investments made in the neighborhood in prior years.

Through the first quarter, builders in our Nice Park group offered 69 houses. That quantity is decrease than regular as a consequence of extraordinarily restricted stock at Solis Park with solely two remaining builder packages at the moment promoting. Regardless of the restricted stock, we’re inspired by sustained curiosity and visitors in the neighborhood, affirming the continuing attraction of the Nice Park Neighborhoods to potential homebuyers.

We imagine the builders share our sentiment as we’re actively engaged with a number of builders on new land sale alternatives. Our subsequent main neighborhood, Luna Park, opened one out of 13 deliberate packages on the finish of 2023, and that program has already offered out. The remaining Luna builder packages are anticipated to begin opening this month with openings persevering with by means of September. As these packages open, we’ll as soon as once more be capable of provide all kinds of housing choices in Nice Park Neighborhoods.

As I discussed in my final earnings name, we anticipated two builder gross sales in Q1 at Nice Park. The primary deliberate dwelling sale closed is scheduled. The second sale required the completion of some extra work earlier than closing. Regardless of this closing, we cut up the sale into two phases, one among which already closed in Q2, we anticipate closing the second section subsequent month.

As I discussed earlier, there stays robust homebuilder curiosity in buying homesites at Nice Park. On this quarter, we accomplished the bidding course of for a bunch of six new dwelling packages with roughly 400 homesites. We’re at the moment finalizing contract negotiations on these dwelling websites. We have additionally began the bidding course of with our homebuilder companions for a sale of 4 new packages with roughly 300 dwelling websites. We’ll have extra to report on these packages later within the yr.

Now, I will transfer to Valencia, our different lively group. Valencia remains to be in its early levels of improvement with many future phases of land supply forward of us, which is able to assist — which may also assist handle the land shortages I mentioned earlier. Through the first quarter, the builders offered 62 new houses. There at the moment are solely 27 houses remaining in our preliminary providing of 1,268 houses.

In our latest Valencia improvement space, we now have 5 new homebuilder packages opened, with two extra nonetheless to be opened later this yr. We’re seeing continued robust demand in Valencia. These new choices will increase our present lineup, and we anticipate that these openings will lead to elevated dwelling gross sales. The six new packages we offered in the long run of final yr are anticipated to open in late 2024 and early ’25.

Homebuilders stay engaged with us in Valencia. On the final name, we talked about our plan to probably convert a 35 acre website from business to residential use, which is permitted below our versatile zoning. We’re now finalizing an settlement to promote this 35 acre mixed-use website for 179 houses with the sale anticipated to shut within the fourth quarter this yr. We even have three extra packages with roughly 200 dwelling websites out to our homebuilder companions for bidding, and we count on to have extra to report on these packages later within the yr.

Turning to San Francisco. We’re persevering with to work with the Metropolis and County of San Francisco to rebalance the entitles between our two San Francisco communities, Candlestick and the Shipyard. As I’ve mentioned earlier than, we’re looking for the rebalancing to allow the event of Candlestick as a stand-alone undertaking. This could enable us to start improvement of Candlestick with out having to attend for the Navy to finish its remediation actions on the Shipyard.

We’re very centered on acquiring vital approvals from numerous Metropolis and County companies and are sustaining momentum to activate Candlestick because the preliminary section of this bigger mixed-use group positioned on irreplaceable land alongside the San Francisco Bay.

Let me conclude by saying our first quarter has seen persevering with progress on our three essential priorities: producing income and constructive money stream; controlling SG&A prices; and managing capital spend to match near-term income alternatives. Moreover, our whole workforce is concentrated on progressing entitlements for our subsequent neighborhoods in Valencia and in transferring Candlestick ahead by means of rebalancing course of.

Our financial and geopolitical occasions have impacted the monetary markets through the quarter, homebuyers in our markets proceed to point out curiosity in our communities. We imagine that pent-up demand will proceed to be a driving drive for our land gross sales to builders. The underlying housing atmosphere displays a persistent provide scarcity that’s compounded by restricted stock of present houses.

Land improvement is a protracted recreation, and we’ve got constantly been enhancing our monetary situation. Our efforts right now are guaranteeing we’re properly positioned inside that lengthy recreation by recognizing the significance of making and sustaining shareholder worth.

Now let me flip it over to Kim, who will report on our monetary outcomes and can present some restricted steerage for the rest of the yr.

Kim Tobler

Thanks, Dan. As Dan talked about, we had been happy to see S&P improve each our issuer and instrument rankings to steady B- and B, respectively. We imagine that this improve is reflective of our improved efficiency and S&P’s conscious understanding of the corporate and its property.

Let me offer you a bit extra background on our working outcomes. For the primary quarter of 2024, we reported consolidated internet earnings of $6.1 million, which included $9.9 million of income and $17.7 million of fairness in earnings from our funding within the Nice Park Enterprise. It additionally contains — inside the income, $8.7 million of the income was associated to our administration companies.

The fairness and earnings from the Nice Park Enterprise was generated primarily from a sale in February of 82 dwelling websites on 11.6 acres of land, with a land gross sales worth of $74.6 million and a revenue margin of 60% earlier than closing prices. This sale comes out to a $6.4 million per acre. The enterprise additionally acknowledged $17.6 million of revenue participation or so-called PAPA (ph) income associated to prior yr land gross sales. In step with our continued deal with managing our prices, our SG&A expense was $12.9 million in comparison with the prior yr of $13.8 million.

Now let me flip to liquidity and money. We ended the quarter with $232.7 million of money, in addition to $125 million of availability on a revolving credit score facility, leading to whole liquidity of $357.7 million. On the finish of the quarter, our debt to whole capitalization was an improved 20.9%.

The issues that materially impacted our money stability this quarter had been: First, the $100 million cost to settle our very profitable senior observe alternate, along with $8.3 million of accrued curiosity and $7.6 million of transaction prices; second, we acquired $24 million in fairness distributions, of which $17.7 million is mirrored in our assertion of money flows as a return on our funding in our working actions; and third, we acquired $6.4 million incentive compensation cost from the Nice Park Enterprise. Now we additionally spent $17.4 million in improvement prices at Valencia and $1.7 million at San Francisco.

I might prefer to take a minute to emphasise the importance of the Nice Park Enterprise in our monetary outcomes. Whereas we’re actively promoting land at each our Valencia undertaking and the Nice Park Enterprise, the Nice Park Enterprise is a extra mature grasp plan group, whereas Valencia remains to be in its early levels.

To that time, in Valencia, we’re nonetheless working by means of the event in gross sales in our first of 9 villages. This primary village represents solely about 3,600 dwelling websites of a complete of as much as roughly 21,500 dwelling websites. At our Nice Park Enterprise, many of the main capital prices have been incurred, and our persevering with capital prices typically have been or will probably be recovered by means of CFD reimbursements.

To evaluation, in 2023, the Nice Park Enterprise offered 798 dwelling websites on 84 acres and offered one other 37.9 acres of economic land for whole income of $532 million. The enterprise additionally acknowledged $21 million of revenue participation, or PAPA. The enterprise made fairness distributions of $411.2 million to holders of share curiosity, of which 5 Level acquired $154.2 million. 5 Level additionally acquired $41.6 million of incentive compensation funds.

Whereas we seek the advice of often with our enterprise companions, 5 Level is the supervisor of the enterprise, and we’re answerable for the day-to-day operations and course of the event. We at the moment count on to take care of the present tempo of gross sales and improvement for the subsequent a number of years.

Now for some restricted steerage. We count on the second quarter internet earnings to be much like or barely larger than the primary quarter. As Dan talked about, we’ve got already had one sale shut on the Nice Park this quarter within the second quarter and predict one other one earlier than the top of the second quarter. For the yr, we count on a complete of between $75 million and $100 million of internet earnings, with nearly all of that earnings being acknowledged within the fourth quarter.

We’re additionally anticipating to finish the yr with between $250 million to $300 million of money. We proceed to see constructive momentum and imagine that we’re seeing advantages from the corporate’s focus and a spotlight on our three essential priorities.

With that, I’ll flip the decision again to the operator.

Query-and-Reply Session

Operator

Thanks. Women and gents, right now, we will probably be conducting a question-and-answer session. [Operator Instructions] Our first query comes from the road of Alan Ratner with Zelman & Associates. Please proceed together with your query.

Alan Ratner

Hey, guys. Good afternoon. Thanks for all the main points to this point. Admire it. Dan, I suppose, my query is extra round a number of the near-term conversations you have had with builders. It sounds such as you’ve bought various parcels out for bidding. And I feel we’re — sadly, most likely three months in the past, we had been all hopeful that the speed outlook would look a bit higher than it does right now.

And with charges climbing larger, I definitely, the fairness markets are starting to cost in some threat of a slowdown. I am curious if there’s something you are seeing in your communities, both on the house sale aspect or by way of the conversations with builders that might counsel any of that concern or cautiousness we’re seeing available in the market is starting to filter by means of to the housing aspect of issues?

Dan Hedigan

Thanks, Alan. At all times good to listen to from you. Attention-grabbing, Alan is, and I feel I discussed in my remarks, what we’re actually seeing right here is the persistent scarcity of land and particularly, builder land, and title land, and residential websites is actually driving what we’re seeing as we’re speaking to and really actively bidding with builders. And that scarcity of housing is definitely seeing extraordinarily robust bids and lively participation by a number of builders on all the pieces we’re taking to market proper now.

And as soon as once more, I feel it is — I do know that California is in such a novel place, there isn’t a new dwelling stock or restricted — sorry, restricted resale stock and restricted entitled land and much. So we aren’t seeing any drop off form of as a result of present monetary market. And as I say, the brand new homebuilders are uniquely positioned to maintain gross sales going. And so that’s — that is precisely what we’re experiencing available in the market.

Alan Ratner

Nice. That is encouraging to listen to. On the Nice Park sale within the quarter, so if I have a look at the worth per acre, $6.4 million, properly above the gross sales you recorded final yr, I feel the typical was about $4.3 million per acre and I do know that is a lumpy quantity. It appears to be like like there may need been one different sale that was in an identical vary again — all the best way again in 2019. However I feel the typical has been extra within the 5s over the previous few years. So is there something distinctive to this parcel that might command the premium or do you are feeling like that is pretty consultant of broader inflation on costs that you simply’re seeing in the neighborhood proper now?

Dan Hedigan

Properly, one factor I’ve talked about to you, I do know the sale that you simply’re reflecting again to had a novel construction. And so that you’re taking a look at form of the entering into worth. However the popping out worth, we count on to be a lot larger. After which as to this particular sale, no, it truly is reflective of the market. There’s nothing distinctive about this. It truly is simply what we’re seeing available in the market right now.

Alan Ratner

Acquired it. In order we take into consideration the subsequent two offers you have bought below contract, clearly, it is going to be possibly a bit unstable, however one thing within the present vary, I suppose, is the place we must always take into consideration the longer term gross sales coming in at.

Dan Hedigan

Sure, completely.

Alan Ratner

Proper. Okay. Admire that. Thanks very a lot.

Dan Hedigan

Thanks, Alan.

Operator

Our subsequent query comes from the road of Myron Kaplan, a Personal Investor. Please proceed together with your query.

Myron Kaplan

Yeah. Hello, gents. Thanks for all the colour and working issues properly with, I suppose, you’ll say, with the SG&A below management and so forth.

Dan Hedigan

Thanks.

Kim Tobler

Thanks, Myron. Admire it.

Myron Kaplan

I suppose the one factor I wished to ask was with this distribution of the Nice Park is the legacy curiosity paid out within the fall at this level?

Kim Tobler

It isn’t. We count on it to be paid out this yr in whole. So there’s about $40 million left. So Myron, I am sorry, there’s solely $10 million left.

Myron Kaplan

$10 million left. In order that’s after this final distribution?

Kim Tobler

Sure.

Myron Kaplan

So in Valencia, what’s — how are you going to — if you have not bought stock in Valencia in the long run of the primary village, how are you going to apart from the combined use? I imply you stated on the finish of the final name, I feel that you simply had about 140 or 150 acres left. So how are you going to actually do enterprise? I imply speak about money stream how are you going to shut on it.

Dan Hedigan

So Myron, one of many issues that you simply’re definitely proper. The primary group of tons we opened, we’re all the way down to a really small stock there. However there’s one other space that there’s in the end going to be seven packages at, 5 are opened and people are actively promoting, and we’ll see extra of these promoting and shutting later this yr. And so there’s two extra to open there. There’s two extra communities opening there.

After which we did six communities final yr. And people — the primary one [indiscernible] on the finish of this yr and the rest of [indiscernible] starting of ’25. In order that stock will — these houses will maintain promoting, which is why we additionally — as I discussed, we’ve got websites out to bid now with builders to maintain that going. The 179 houses that you simply talked about, these are going to lag the market, however these needs to be opening subsequent yr additionally.

Myron Kaplan

If we ask the place is the cash, a number of that is kind of off sooner or later, sure?

Kim Tobler

Not true. I imply, once more, we’re actively promoting in Valencia this yr and subsequent yr, after which we’ll be asserting extra about what’s following that as we get nearer to it, Myron.

Myron Kaplan

So only one query — one merchandise that you simply talked about, Luna Park, I did not perceive in any respect. What is the scenario in Luna Park, I imply…

Dan Hedigan

So Luna Park was the transaction we closed early final yr, most likely about this time final yr after I give it some thought. And so they’ve been engaged on the fashions. And there was 13 packages, it was 799 dwelling websites, 13 packages. The primary one was a really small program. It is opened and offered out. And they’re now — the subsequent 12 are opening, they’re beginning to open this month, and they are going to proceed opening and so we’ll have all of these open someday this yr. And as soon as once more, it is — we had Solis, which is winding down. Now Luna is one other model new group, massive group like we do on the Nice Park Neighborhoods and it’s within the strategy of opening up all of its fashions.

Myron Kaplan

So you can promote websites?

Kim Tobler

Yeah. Myron, we’re nonetheless promoting websites, sure.

Myron Kaplan

So you possibly can promote websites as a result of it is just like the builders are promoting a number of houses, however you are not promoting a number of websites.

Kim Tobler

Sure. So Myron, to that time, I imply we at all times like to provide the colour on what the gross sales tempo is of the builders. After which, we attempt to illustrate that we’re nonetheless promoting tons to them as properly, that is why Dan talked about these extra gross sales.

Myron Kaplan

Potential gross sales.

Kim Tobler

Potential gross sales.

Myron Kaplan

Sure. All proper. Properly, I suppose, as you say, it is a lengthy recreation. It definitely is.

Kim Tobler

Thanks, Myron.

Operator

[Operator Instructions] Now we have a query from the road of Ken Hansen with Stifel. Please proceed together with your query.

Unidentified Participant

Thanks for taking my query. Only for full disclosure on a CFA, however not representing Stifel on the decision. I am representing my very own shareholder curiosity. I just like the second precedence that you have recognized because the controlling of value. And I do know, Dan, once you got here on Board, you had a big discount in worker depend. I feel it was possibly a 30% discount, one thing like that. And that is been useful, I feel.

I am simply questioning now what you consider the scale of the Board? I feel it was 11 once you got here on Board and possibly it is all the way down to 9. However when you consider the ratio of Board members and workers, it appears a bit heavy — not a bit heavy, rather a lot heavy. Lunar has the identical variety of Board members, I feel, and so they have 12,000 workers.

So I am questioning if possibly simply an optics factor, however possibly it is a flexibility factor as properly and positively could be a value financial savings if the Board had been smaller. So might you simply touch upon the scale of the present Board and any curiosity you have got in making it extra nimble and responsive? Thanks.

Dan Hedigan

Ken, thanks in your query. The Board has been 9 so long as I have been right here. I do not know if it was 11 that you simply talked about, however definitely it has been 9 so long as I have been right here. And I can let you know that the Board truly does check out their operate and operation yearly. And at this level, the Board is functioning properly. And I might — I would just should defer, that is to the Board to make these forms of selections, to not me per se. However we’ve got — I feel we’ve got a really lively Board that has been very supportive in my transition into this function.

Unidentified Participant

And I do know, I feel Mr. Miller is on distant, can he reply to that?

Dan Hedigan

Yeah. I do not suppose that might be acceptable to get into beating our Board on this name, however we respect the query.

Unidentified Participant

Okay.

Stuart Miller

And I’m on distant. I agree with Dan.

Operator

That concludes our question-and-answer session. I might like handy it again to Mr. Hedigan for closing remarks.

Dan Hedigan

Thanks a lot. On behalf of our administration workforce, we thanks for becoming a member of us on right now’s name, and we stay up for talking with you subsequent quarter.

Operator

Women and gents, this does conclude right now’s teleconference. Thanks in your participation. Chances are you’ll disconnect your traces right now, and have a beautiful day.