Introduction to Five Point Holdings
Five Point Holdings (NYSE:FPH) is a land developer which has three major assets across California. Throughout the past decade, the company has steadily developed and sold tracts of land to home builders who now offer hundreds of modern housing units going for over $1 million on average. As such, revenues have been volatile, but trending upwards, thanks to favorable partnerships with developers and high demand. The pandemic was a boon for the housing market, launching prices higher throughout 2021 and into 2022. However, the share price of Five Point has been falling since 2017, leading to a significant undervaluation in my eyes. This article will describe the three major assets of the company and go through recent market data to understand how the next few months are set to play out.
The company composition and payouts to shareholders of different units cause revenues and earnings to be tricky to understand. I would recommend reading the SEC filing for the most recent annual report to get a clearer picture.
FivePoint Great Park
Irvine is the major commercial, industrial, and technological hub of Southern California. With a significant amount of local and global headquarters for hundreds of major companies around the world, the area is expensive, growing, and in high demand. Five Point is developing a major plot of land that used to be Marine Corps Air Station El Toro. The location is within five to ten minutes driving time of the major Irvine Spectrum mall, 5 and 405 interstates, and the University of California, Irvine (my alma mater). Major companies headquartered or located in the vicinity include multiple video game studios such as Blizzard Entertainment (ATVI), healthcare leaders such as Edwards Lifesciences (EW) and Allergan (ABBV), semiconductor companies such as Western Digital (WDC) and Broadcom (AVGO), and even an EV developer Rivian (RIVN). As you can see, the region is full of high value, high-growth companies that are both A.) hiring (by looking at company career pages), and B.) providing the necessary income required to purchase Five Point’s expensive properties.
Development partners include Lennar (LEN), Taylor Morrison (TMHC), and Pulte (PHM). Prices range from $900,000 to $1.8 million, and all are townhome style. This contrasts with single-family homes in the area that start above $2 million. Competition is non-existent in my opinion as the house prices are comparable to other homes in the area, including most of Orange County, and why would someone choose to pay $800-$900 thousand for a 60s era house in a worse neighborhood that needs extensive work done. Although, while this Irvine property is one of the largest in the county, there are plenty of other new developments in the area that offer similar prices for new homes. Demand will be driven by the supply and demand data that I discussed above, and Great Park’s location remains superior.
Five Point puts much effort into the creation of trendy and progressive communities, full of public space and social venues. The development also includes recreation parks, trails, and three schools to support a diverse and healthy community. The company seems to be leading in a new sustainable form of urban “new suburbanism”: dense housing but with plenty of sensibility. The area is set to have 10,500 homes, and 3,800 have been sold so far. As such, there is still a few more years of development in store to draw the majority of revenues. Lastly, less than 10% of units are set to be “affordable”, so this both limits profit losses and risk as luxury residents are in high supply. I believe “affordable” units are in the $900s just as a reference.
The second major development area for FPH is in the outer LA county City of Santa Clarita. Located about an hour away from LA, the community of Valencia is a major master planned community set to over a quarter of a million in population and millions of sq ft in commercial space. While the community was well established already prior to Five Point involvement, the company plans to add 21,500 homes, 7 new schools, and 10,000 acres of open space and trails. Home prices are lower on average than Orange County due to the location, but the homes listed on the Valencia page start at a meager $400- $600,000 (1-3 bedrooms).
Thanks to the favorable location along the 5 corridor and conveniently located next to Six Flags Magic Mountain (SIX), prices are able to remain relatively higher than other cities an hour away from LA. You may have noticed the development during a recent visit to Six Flags when looking towards the west. Partner developers include Lennar, KB Home (KBH), Toll Brothers (TOL), Richmond American (MDC), Tri Pointe (TPH), and more. While the area is growing economically thanks to a shift away from the central LA area and location along the 5 corridor, slightly more risk exists in regards to the safety of the valuation of this project when compared to the affluent Irvine region.
FivePoint San Francisco
Another future development that investors can look forward to is in San Francisco at the location of where the old Candlestick Baseball stadium used to be located. The current wasteland/trailer park offers a large block of land to transform into a new major community in SF. The location to the south of the city center offers some exposure to the Silicon Valley crowd, and may be able to support high prices. While risk exists due to the current high market prices, loss of population in the bay area, and political environment, I do not see SF not being able to maintain its leading status as a world-class city. The development is still in the early stage, but the company has a goal for 10,700 homes and over 6 million sq ft of commercial and entertainment space.
The California Real Estate Market
The housing market has some unstable signs to consider, but in general, I find the state is better off than areas that saw extreme growth during the pandemic. February saw a continuation in the upward trend of house prices in Southern California, although the numbers of sales have fallen. The 12.6% increase in price to $760,000 is a high not seen in any other region in the country, except the bay area. Five Point has begun selling plots of lands and earning home sales fees over the past few years, and so are able to benefit from the upward price trend.
However, after home sales rose significantly in 2021, 2022 has started off with an almost 10% decline. This may also lead to a steep decrease in home value down the line. Although, high-value homes seem to be holding up better than low-value houses. As Five Point’s holdings are in high-value regions, we can look for positive revenue metrics in 2022 and beyond as long as the market is healthy. There is still plenty of demand out there, but the problem is supply. In the last earnings call, the management claimed that there are no homes sitting empty, and that inventory is being sold as soon as construction is complete. As of 2021, the only issue is the lack of supplies and labor developing housing.
Although numbers of units sold are falling, prices remain in their upward trend, further signifying short-term momentum favors FPH. As the company mostly develops townhome style units, it is important to look at the corresponding data. With an average price of $640,00 in Feb 2022, an incredible opportunity exists in the segment. A shift in townhome quality, availability, and demand has allowed townhome prices per square ft values to increase far above single family home values. This is further evidence that builders working with Five Point are well positioned to continue driving sales. In turn, the builders will continue buying homesites from Five Point. This may be a sign that townhomes are leading the advance in new development across Southern California as the need for more housing, without expanding our footprint as fast into natural areas, is at the fore. I believe that FPH has a good balance between environmental stewardship, conservative housing expansion, and high density opportunities.
Lastly, an important metric to follow is the availability of inventory. Prices will continue to rise due to the extremely low supply. Although it seems like this trend may end, no concrete pattern has emerged. Therefore, for the time being, we can say that new construction such as the case with FPH will continue to have an advantage in both pricing and demand as they are essentially the only new entrants to the market. However, due to supply chain issues and inflation, revenue growth has been slower and development is more costly than anticipated. This is one reason for the extremely low valuations for both land holders and home builders. I will discuss the financials and valuation next.
Since development is shifted to home builders, FPH makes their money through homesite sales and fee-build arrangements. As of the full year of 2021, the Irvine development saw 887 homesites and 16 homes sold, allowing for $419.5 million in revenues. Further, distributions and incentive payments totaled $98.3 million, and builder sales increased 11% YoY. In Valencia, 643 homesite sales brought in $167.3 million. A total of 1,866 homesites have been sold there, while only 346 builder home sales have occurred, allowing for significant growth in fee revenue over the coming years as more homes are sold. The San Francisco development is not earning revenue yet.
While revenues are linked to the state of available development, expenses are linked to development services, marketing, and managing properties, and this has in the past led to volatile net income over the years. Taking a look at the balance sheet, the company has been slowly draining their cash pile over the past five years. However, debt raised from 2017 to 2019 has also been falling. Now, the company has a fairly tolerable net debt level of $440 million. Although, I would look to the company to increase profitability in order to feel safer about this level of debt.
One interesting point to consider as a strong point to the company is the value of their land assets. The company currently has a book value per share of $9.05. This contrasts with revenue per share of $3.33 and earnings per share of $0.09. As such, FPH is trading at a price to book of just 0.66. Real estate names have taken a beating over the past few months to a year, and valuations are incredibly low. For a prospector like Five Point which has failed to exhaust their inventory, I find there is plenty of opportunity that remains.
While the current valuation of the company is very low, there are a few data points to consider for this investment. First is the state of the housing market and recession. While prices remain elevated, sales are already slowing down as mortgage rates go up. In the future, prices may fall as supply and demand rebalance after the pandemic period. Further, the risk for financial difficulties is possible due to inflationary pressures. However, Five Point has the benefit of their assets being in high demand regions with growing and high-income residents. As the company puts a lot of effort into creating sustainable communities and residents enjoy living there, inventory will continue to be sold as soon as it hits the market.
Also, to combat the issue of supply chain and labor shortages, the company has not sold as many lots as they could have to developers to make sure there is no excess inventory and costs. This will likely continue into the future as the company watches supply and demand in the market. I listed multiple home builders that are buying land off FPH in the article, and so I would recommend looking at their performance as well.
Along with studying the real estate market, it will also be important to watch Five Point work into a profitable growth mode. While the three sites are all mostly undeveloped, losses should not be expected long term. However, we cannot tell how profitability will turn out after Irvine and Valencia units get mostly sold. I would like to hear management provide more insight into the commercial, rental, and management service revenues that will be necessary for future growth. Lastly, one positive point to consider is the new CEO in place who seems to be focused on increasing profitability. Time will tell on his success, and so I will wait to see how things play out over the next few months. I will provide a deep dive into the company then, as it is quite complex.
Thanks for reading, feel free to comment on anything below.