NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BUSINESS AND ORGANIZATION
Five Point Holdings, LLC, a Delaware limited liability company (the "Holding Company") was formed on July 21, 2009. Prior to the completion of the Formation Transactions (as defined below) on May 2, 2016, the Holding Company was named Newhall Holding Company, LLC and through the operations of its subsidiaries, was primarily engaged in the planning and development of Newhall Ranch, a master-planned community located in northern Los Angeles County, California (the Holding Company together with its subsidiaries, the "Company"). Following completion of the Formation Transactions, the Company additionally owns interests in, plans, and manages the development of multiple mixed-use, master-planned communities in coastal California, which are expected to include residential homes, commercial space, as well as retail, education and recreational elements, civic areas and parks and open spaces. In August 2017, the Company acquired an investment in a one million square foot commercial office and research and development campus (the "Five Point Gateway Campus") located on one of its master-planned communities (see Note 4).
On October 1, 2017, the Holding Company converted its operating subsidiary, Five Point Operating Company, LLC, from a Delaware limited liability company to a Delaware limited partnership named Five Point Operating Company, LP (in either instance, the "Operating Company"). The Holding Company conducts all of its operations through the Operating Company. The Holding Company's wholly owned subsidiary is the managing general partner of the Operating Company and at September 30, 2017 and December 31, 2016, the Holding Company and its wholly owned subsidiary owned approximately 58.6% and 50.4%, respectively, of the outstanding Class A Common Units of the Operating Company. The Holding Company also owned all of the outstanding Class B Common Units of the Operating Company at both September 30, 2017 and December 31, 2016.
Initial Public Offering
On May 15, 2017, the Holding Company completed an initial public offering ("IPO") and sold 24,150,000 Class A common shares at a public offering price of $14.00 per share, which included 3,150,000 shares pursuant to the full exercise by the underwriters of their over-allotment option, resulting in gross proceeds of $338.1 million. The Holding Company used the net proceeds of the IPO to purchase 24,150,000 Class A Common Units of the Operating Company. The aggregate net proceeds to the Company after deducting underwriting discounts and commissions and before offering expenses payable by the Company, was $319.7 million.
Concurrent with the IPO, the Company completed a private placement with an affiliate of Lennar Corporation ("Lennar") in which the Operating Company sold 7,142,857 Class A Common Units of the Operating Company at a price per unit equal to the IPO public offering price per share, and the Holding Company sold an equal number of Class B common shares at a price of $0.00633 per share. There were no underwriting fees, discounts or commissions, and aggregate proceeds from the private placement were $100.0 million. The Holding Company used the proceeds from the sale of the Class B common shares to purchase 7,142,857 Class B Common Units of the Operating Company at a price of $0.00633 per unit.
Reverse Share Split
On March 30, 2017, the board of directors of the Holding Company (the "Board") approved, and on March 31, 2017 the Company effected, (i) a 1 for 6.33 reverse share split of issued and outstanding Class A and Class B common shares of the Holding Company, (ii) a 1 for 6.33 reverse unit split of issued and outstanding Class A and Class B Common Units of the Operating Company, and (iii) a 1 for 6.33 reverse unit split of the issued and outstanding Class A and Class B Units of The Shipyard Communities, LLC (the "San Francisco Venture") (the "Reverse Split"). All share, unit, per share, and per unit amounts in the accompanying condensed consolidated financial statements have been restated for all periods presented to give effect to the Reverse Split.
Formation Transactions
On May 2, 2016, the Company completed a series of transactions (the "Formation Transactions") pursuant to a Second Amended and Restated Contribution and Sale Agreement (the "Contribution and Sale Agreement"). The principal organizational elements of these transactions were as follows:
• The Holding Company’s limited liability company agreement was amended and restated to, among other things (i) convert the membership interests previously designated as "Class A Units" into "Class A common shares" with each Class A Unit converted into one Class A common share, (ii) terminate and cancel the membership interests designated as "Class B Units," and (iii) create a second class of shares designated as "Class B common shares." The holders of Class A and Class B common shares are entitled to one vote per share, and the holders of Class B common shares receive distributions per share equal to 0.03% of the per share distributions to the holders of Class A common shares;
• The Operating Company’s limited liability company agreement was amended and restated to, among other things, (i) create two classes of membership interests designated as "Class A Common Units" and "Class B Common Units," (ii) convert all existing membership interests of the Operating Company into Class A Common Units, (iii) reflect the issuance of Class A Common Units per the Contribution and Sale Agreement, (iv) reflect the issuance of Class B Common Units to the Holding Company, and (v) appoint the Holding Company as the operating managing member;
• All noncontrolling interest members of the Company’s consolidated subsidiary Five Point Land, LLC ("FPL" formerly named Newhall Land Development, LLC) contributed to the Operating Company 7,513,807 units of FPL in exchange for 7,513,807 Class A Common Units of the Operating Company;
• The Company acquired 37.5% of the Percentage Interest (as defined in Note 4) in Heritage Fields LLC (the "Great Park Venture"), the entity that is developing Great Park Neighborhoods in Irvine, California, in exchange for 17,749,756 Class A Common Units of the Operating Company;
• The Company acquired all of the Class B units of, and became the managing member of, the San Francisco Venture, the entity that is developing The San Francisco Shipyard and Candlestick Point in San Francisco, California, in exchange for 378,578 Class A Common Units of the Operating Company and other consideration;
• The limited liability company agreement of the San Francisco Venture was amended and restated to provide for the possible future exchange of all of the Class A units of the San Francisco Venture for Class A Common Units in the Operating Company;
• The Company acquired all of the limited partners’ Class A interests in Five Point Communities, LP and all of the stock in its general partner, Five Point Communities Management, Inc. (together, the "Management Company"), the entities which have historically managed the development of Great Park Neighborhoods and Newhall Ranch, in exchange for 798,161 Class A common shares of the Holding Company, 6,549,629 Class A Common Units of the Operating Company, and other consideration;
• Simultaneously with the completion of the Formation Transactions, the Holding Company entered into a tax receivable agreement ("TRA") with investors that hold Class A Common Units of the Operating Company and investors that hold Class A units of the San Francisco Venture. The TRA provides for payment by the Holding Company to such investors or their successors of 85% of the amount of cash savings, if any, in income tax the Holding Company realizes as a result of, (a) increases in tax basis that are attributable to exchanges of Class A units for the Holding Company’s Class A common shares or cash, or certain other taxable acquisitions of equity interests by the Holding Company, (b) allocations that result from the application of the principles of Section 704(c) of the Code and (c) tax benefits related to imputed interest or guaranteed payments deemed to be paid or incurred by us as a result of the TRA agreement; and
• The Holding Company sold 74,320,576 Class B common shares for aggregate consideration of $0.5 million to investors holding Class A Common Units of the Operating Company and holders of Class A units of the San Francisco Venture. Each investor was entitled to purchase one Class B common share for each unit held.
The diagram below presents a simplified depiction of the Company’s organizational structure immediately after completion of the Formation Transactions:
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The Operating Company owns all of the outstanding Class B units of the San Francisco Venture. The Class A units of the San Francisco Venture, which the Operating Company does not own, may be exchanged for Class A Common Units of the Operating Company (see Note 3).
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The Operating Company owns a noncontrolling 37.5% Percentage Interest in the Great Park Venture. However, the Operating Company does not own any Legacy Interest in the Great Park Venture (see Note 4).
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The Operating Company owns all of the outstanding stock and all of the Class A interests in Five Point Communities Management Inc. and Five Point Communities, LP, respectively. The Company does not own any Class B interest in Five Point Communities, LP. Through the Second Amended and Restated Development Management Agreement (the "A&R DMA"), the Management Company is compensated by the Great Park Venture as its development manager (see Note 10).
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation—The accompanying condensed consolidated financial statements include the accounts of the Company and the accounts of all subsidiaries in which the Company has a controlling interest and the accounts of variable interest entities ("VIEs") in which the Company is deemed to be the primary beneficiary. A VIE is an entity in which either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. The Company identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or receive benefits of the VIE that could potentially be significant to the entity. The Company consolidates its investment in a VIE when it determines that it is its primary beneficiary. The Company may change its original assessment of a VIE upon subsequent events such as the modification of contractual arrangements that affect the characteristics of the entity’s equity investments at risk and
the disposition of all or a portion of an interest held by the primary beneficiary. The Company performs this analysis on an ongoing basis. All intercompany transactions and balances have been eliminated in consolidation.
The accompanying condensed consolidated financial statements 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 audited consolidated financial statements and accompanying notes as of and for the years ended December 31, 2016 and 2015 included in the Company’s prospectus dated May 9, 2017, filed with the Securities and Exchange Commission (the "SEC") in accordance with Rule 424(b) of the Securities Act of 1933, as amended (the "Securities Act"), on May 11, 2017. 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 and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
The accounts and operating results of the consolidated businesses acquired in the Formation Transactions have been included in the accompanying condensed consolidated financial statements from the acquisition date forward.
Reclassifications—The Company has reclassified prior year amounts in the statement of operations related to the cost of management services to conform to the current year's financial statement presentation. The reclassifications had no effect on the Company's previously reported financial position, results of operations or cash flows.
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.
Concentration of credit risk—As of September 30, 2017, the Company’s inventories and the Company's unconsolidated entities' inventories and properties are all located in California. The Company is subject to risks incidental to the ownership, development, and operation of commercial and residential real estate. These include, among others, the risks normally associated with changes in the general economic climate in the communities in which the Company operates, trends in the real estate industry, availability of land for development, changes in tax laws, interest rate levels, availability of financing, and potential liability under environmental and other laws.
The Company’s credit risk relates primarily to cash, cash equivalents, restricted cash and certificates of deposit and marketable securities—held to maturity. Cash accounts at each institution are currently insured by the Federal Deposit Insurance Corporation up to $250,000 in the aggregate. At various times during the nine months ended September 30, 2017 and 2016, the Company maintained cash account balances in excess of insured amounts. The Company has not experienced any credit losses to date on its cash, cash equivalents, restricted cash and certificates of deposit, and marketable securities—held to maturity. The Company’s risk management policies define parameters of acceptable market risk and limit exposure to credit risk.
Business Combinations—The Company accounts for businesses it acquires in accordance with Accounting Standards Codification ("ASC") Topic 805, Business Combinations. This methodology requires that assets acquired and liabilities assumed be recorded at their respective fair values on the date of acquisition. Accordingly, the Company recognizes assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities and non-controlling interest in the acquiree, based on the fair value estimates as of the date of acquisition. Any excess of the purchase consideration over the net fair value of tangible and identified intangible assets acquired less liabilities assumed is recorded as goodwill. The costs of business acquisitions are expensed as incurred. These costs may include fees for accounting, legal, professional consulting and valuation specialists. Purchase price allocations may be preliminary and, during the measurement period, not to exceed one year from the date of acquisition, changes in assumptions and estimates that result in adjustments to the fair value of assets acquired and liabilities assumed are recorded in the period the adjustments are determined.
Contingent consideration assumed in a business combination is remeasured at fair value each reporting period and any change in the fair value from either the passage of time or events occurring after the acquisition date, is recorded in results from operations.
The estimated fair value of acquired assets and assumed liabilities requires significant judgments by management and are determined primarily by a discounted cash flow model. The determination of fair value using a discounted cash flow approach also requires discounting the estimated cash flows at a rate that the Company believes a market participant would determine to be commensurate with the inherent risks associated with the asset and related estimated cash flow streams.
Noncontrolling interests—The Company presents noncontrolling interests and classifies such interests within capital, but separate from the Company’s Class A and Class B members’ capital when the criteria for permanent equity classification has been met. Noncontrolling interests in the Company represent interests held by former owners of subsidiaries of the Operating Company and the pre-Formation Transactions investors of the Operating Company excluding the Holding Company. Net income or loss of the Operating Company is allocated to noncontrolling interests based on substantive profit sharing arrangements within the operating agreements, or if it is determined that a substantive profit sharing arrangement does not exist, allocation is based on relative ownership percentage of the Operating Company and the noncontrolling interests.
Revenue recognition—Revenues from land sales are recognized when a significant down payment is received, the earnings process is complete, title passes, and the collectability of any receivables is reasonably assured. When the Company has an obligation to complete development on sold property, it utilizes the percentage-of-completion method of accounting to record revenues and earnings. Under percentage-of-completion accounting, revenues and earnings are recognized based upon the ratio of development cost completed to the estimated total cost of the property sold, provided that required sales recognition criteria have been met. Estimated total costs include direct costs to complete development on the sold property in addition to indirect costs and certain cost reimbursement for infrastructure and amenities that benefit the entire project. Significant assumptions used to estimate total costs include engineering and construction estimates for such inputs as unit quantities, unit costs, labor costs, and development timelines. Currently, reimbursements received by the Company are predominantly funded from Community Facilities District ("CFD") bond issuances, however other sources of reimbursements such as state and federal grants and tax increment financing are expected to offset development costs of the Company’s projects. The estimate of proceeds available from reimbursement sources are impacted by home sale absorption and pricing within the CFD and project area, assessed property tax values and market demand for financial instruments such as bonds issued by CFDs. Changes in estimated total cost of the property sold will impact the amount of revenue and profit recognized under percentage-of-completion accounting in the period in which they are determined and future periods. Estimated losses, if any, on sold property are recognized in the period in which such losses are determined.
Residential homesite sale agreements can contain a provision, whereby the Company would receive from builders a portion of the overall profitability of the homebuilding project after the builder has received an agreed-upon return ("profit participation"). If project profitability falls short of the participation thresholds, the Company would receive no additional revenues and has no financial obligation to the builder. Revenues from profit participation are recognized when sufficient evidence exists that the homebuilding project has met the participation thresholds and the Company has collected the profit participation or is reasonably assured of collection. The Company defers revenue on amounts collected in advance of meeting the recognition criteria. Profit participation agreements are evaluated each period to determine the portion earned and any such amounts are included in land sales in the consolidated statements of operations.
The Company records management services revenues over the period in which the services are performed, fees are determinable, and collectability is reasonably assured. The Company records revenues from annual fees ratably over the contract period using the straight-line method. In some of its development management agreements, the Company receives additional compensation equal to the actual general and administrative costs incurred by the Company’s project team. In these circumstances, the Company acts as the principal and records management fee revenues on these reimbursements in the same period that these costs are incurred. Lastly, the Company’s management agreements may contain incentive compensation fee provisions contingent on the performance of its client. The Company recognizes such revenue in the period in which the contingency is resolved and only to the extent other recognition conditions have been met.
Included in operating properties revenues in the consolidated statements of operations are revenues from the Company’s agriculture and energy operations and its golf club operation, Tournament Players Club at Valencia Golf Course.
Impairment of assets—Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. Impairment indicators for long-lived inventory assets include, but are not limited to, significant increases in land development costs, significant decreases in the pace and pricing of home sales within the Company’s communities and surrounding areas and political and societal events that may negatively affect the local economy. For operating properties, impairment indicators may include significant increases in operating costs, decreased utilization, and continued net operating losses. If indicators of impairment exist, and the undiscounted cash flows expected to be generated by a long-lived asset are less than its carrying amount, an impairment charge is recorded to write down the carrying amount of such long-lived asset to its estimated fair value. The Company generally estimates the fair value of its long-lived assets using a discounted cash flow model or through appraisals of the underlying property or a combination thereof.
The Company’s projected cash flows for each long-lived inventory asset 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 costs, and other factors. For operating properties, the Company’s projected cash flows also include estimates and assumptions about the use and eventual disposition of such properties, including utilization, capital expenditures, operating expenses, and the amount of proceeds to be realized upon eventual disposition of such properties.
In determining these estimates and assumptions, the Company utilizes historical trends from past development projects of the Company in addition to internal and external market studies and trends, which generally include, but are not limited to, statistics on population demographics and unemployment rates.
Using all available information, the Company calculates its best estimate of projected cash flows for each asset. While many of the estimates are calculated based on historical and projected trends, all estimates are subjective and change as market and economic conditions change. The determination of fair value also requires discounting the estimated cash flows at a rate the Company believes a market participant would determine to be commensurate with the inherent risks associated with the asset and related estimated cash flow streams. The discount rate used in determining each asset’s fair value generally depends on the asset’s projected life and development stage.
Share-based payments—On May 2, 2016, the Company adopted the Five Point Holdings, LLC 2016 Incentive Award Plan (the "Incentive Award Plan"), under which the Company may grant equity incentive awards to employees, consultants and non-employee directors. Share-based payments are recognized in the statement of operations based on their measurement date fair values. Forfeitures, if any, are accounted for in the period when they occur.
Cash and cash equivalents—Included in cash and cash equivalents are short-term investments that have original maturity dates of three months or less. The carrying amount approximates fair value due to the short-term nature of these investments.
Restricted cash and certificates of deposit—Restricted cash and certificates of deposit consist of cash, cash equivalents, and certificates of deposit held as collateral on open letters of credit related to development obligations or because of other legal obligations of the Company that require the restriction.
Marketable securities—The Company's investments in marketable securities are comprised of debt securities. The Company purchases each investment with the intent and ability to hold the investment until maturity. Investments are carried at amortized cost. Amortization and accretion of premiums and discounts are included in selling, general, and administrative costs and expenses in the accompanying condensed consolidated statements of operations. The Company evaluates securities in unrealized loss positions for evidence of other-than-temporary impairment, considering, among other things, duration, severity, and financial condition of the issuer. No other-than-temporary impairments were identified during either the nine months ended September 30, 2017 or 2016.
Properties and equipment—Properties and equipment primarily relate to the Company’s operating properties’ businesses, are recorded at cost. Properties and equipment, other than land, are depreciated over their estimated
useful lives using the straight-line method. At the time properties and equipment are disposed of, the asset and related accumulated depreciation, if any, are removed from the accounts, and any resulting gain or loss is credited or charged to earnings. The estimated useful life for land improvements and buildings is 10 to 40 years while the estimated useful life for furniture, fixtures, and equipment is two to 15 years.
Investments in unconsolidated entities—For investments in entities that the Company does not control, but exercises significant influence, the Company uses the equity method of accounting. The Company’s judgment with regard to its level of influence or control of an entity involves consideration of various factors including the form of its ownership interest, its representation in the entity’s governance, its ability to participate in policy-making decisions, and the rights of other investors to participate in the decision-making process to replace the Company as manager or to liquidate the entity. Investments accounted for under the equity method of accounting are recorded at cost and adjusted for the Company’s share in the earnings (losses) of the venture and cash contributions and distributions. Any difference between the carrying amount of the equity method investment on the Company’s balance sheet and the underlying equity in net assets on the entity’s balance sheet results in a basis difference which is adjusted as the related underlying assets are depreciated, amortized, or sold and the liabilities are settled. The Company generally allocates income and loss from unconsolidated entities based on the venture’s distribution priorities, which may be different from its stated ownership percentage.
The Company evaluates the recoverability of its investment in unconsolidated entities by first reviewing each investment for any indicators of impairment. If indicators are present, the Company estimates the fair value of the investment. If the carrying value of the investment is greater than the estimated fair value, management makes an assessment of whether the impairment is "temporary" or "other-than-temporary." In making this assessment, management considers the following: (1) the length of time and the extent to which fair value has been less than cost, (2) the financial condition and near-term prospects of the entity, and (3) the Company’s intent and ability to retain its interest long enough for a recovery in market value. If management concludes that the impairment is "other-than-temporary," the Company reduces the investment to its estimated fair value. No other-than-temporary impairments were identified during either the nine months ended September 30, 2017 or 2016.
Inventories —Inventories primarily include land held for development and sale. Inventories are stated at cost, less reimbursements, unless the inventory within a community is determined to be impaired, in which case the impaired inventory would be written down to fair market value. Capitalized direct and indirect inventory costs include land, land in which the Company has the rights to receive in accordance with a disposition and development agreement (see Note 3), land development costs, real estate taxes, and interest related to financing development and construction. Land development costs can be further broken down to costs incurred to entitle and permit the land for its intended use; costs incurred for infrastructure projects, such as schools, utilities, roads, and bridges; and site costs, such as grading and amenities, to bring the land to a saleable state. General and administrative costs related to project litigation are charged to expense when incurred. Costs that cannot be clearly associated with the acquisition, development, and construction of a real estate project and selling expenses are expensed as incurred. The Company expenses advertising costs as incurred, which were $1.2 million and $0.8 million during the three months ended September 30, 2017 and 2016, respectively, and $3.3 million and $1.9 million during the nine months ended September 30, 2017 and 2016, respectively. Certain public infrastructure project costs incurred by the Company are eligible for reimbursement, typically, from the proceeds of CFD bond debt, state and federal grants or property tax assessments.
A portion of capitalized inventory costs is allocated to individual parcels within a project using the relative sales value method. Under the relative sales value method, each parcel in the project under development is allocated costs in proportion to the estimated overall sales prices of the project such that each parcel to be sold reflects the same gross profit margin. Since this method requires the Company to estimate the expected sales price for the entire project, the profit margin on subsequent parcels sold will be affected by both changes in the estimated total revenues, as well as any changes in the estimated total cost of the project.
Intangible Asset—In connection with the Company’s acquisition of the Management Company (see Note 3), the Company acquired an intangible asset related to the contract value of the incentive compensation provisions of the Management Company’s development management agreement with the Great Park Venture. The Company records amortization expense over the contract period based on the pattern in which the Company expects to receive the economic benefits from the incentive compensation.
Receivables —The Company evaluates the carrying value of receivables, which includes receivables from related parties, at each reporting date to determine the need for an allowance for doubtful accounts. As of both September 30, 2017 and December 31, 2016, the allowance for doubtful accounts was not significant.
Fair value measurements—The Company follows guidance for fair value measurements and disclosures that emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, 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.
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
In instances where the determination of the fair value measurements is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The carrying amount of the Company's financial instruments, which included cash and cash equivalents, restricted cash and certificates of deposit, marketable securities, related party assets, notes payable, accounts payable and other liabilities, and certain related party liabilities approximated the Company's estimates of fair value at both September 30, 2017 and December 31, 2016. The fair value of the Company’s notes payable (see Note 11) and related party EB-5 reimbursement obligation (see Note 10), are estimated using level 2 inputs, by discounting the expected cash flows based on rates available to the Company as of the measurement date. The carrying amounts of the Company’s other financial instruments approximates the estimated fair value due to their short-term nature.
Other than contingent consideration (see Note 3 and Note 10), the Company had no other assets or liabilities that are required to be remeasured at fair value on a recurring basis at both September 30, 2017 and December 31, 2016.
Offering Costs—Costs incurred by the Company, totaling $2.9 million, that were directly attributable to the IPO were deferred and charged against the gross proceeds of the offering as a reduction of members’ contributed capital. The Company had $1.0 million in deferred equity offering costs at December 31, 2016 included in other assets on the accompanying consolidated balance sheet.
Income taxes—The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”), 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.
The Holding Company has elected to be treated as a corporation for U.S. federal, state, and local tax purposes and determines the provision or benefit for income taxes on an interim basis using an estimate of its annual effective tax rate and the impact of specific events as they occur.
The Company's estimate of the Holding Company's annual effective tax rate is subject to change based on changes in federal and state tax laws and regulations, the Holding Company's ownership interest in the Operating Company and the Operating Company's ownership in the San Francisco Venture, and the Company's assessment of its deferred tax asset valuation allowance. Cumulative adjustments are made in interim periods in which the Company identifies a change in its estimate of the amount of future tax benefit when it is more likely than not that some portion of the deferred tax assets will not be realized. Among other things, the nature, frequency and severity of prior cumulative losses, forecasts of future taxable income, the duration of statutory carryforward periods, the Company's utilization experience with operating loss and tax credit carryforwards and tax planning alternatives are considered and evaluated when assessing the need for a valuation allowance. Any increase or decrease in a valuation allowance
could have a material adverse effect or beneficial effect on the Holding Company’s income tax provision and net income or loss in the period the determination is made. The Holding Company recognizes interest or penalties related to income tax matters in income tax expense.
Recently issued accounting pronouncements—In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 supersedes most existing revenue recognition guidance, including industry-specific revenue recognition guidance. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, which deferred the effective date of ASU No. 2014-09 by one year to interim and annual reporting periods beginning after December 15, 2017 for public entities. Further, the application of ASU No. 2014-09 permits the use of either the full retrospective or cumulative effect transition approach. The Company plans to adopt ASU No. 2014-09 on January 1, 2018 using the cumulative effect transition approach. Some of the Company’s land sale contracts include contingent amounts of variable consideration in the form of revenue or profit participation with homebuilders. The Company currently defers revenue recognition from such participation arrangements until the amount becomes fixed and determinable. Under the new guidance the Company will be required to estimate the amount of variable consideration expected to be received from the homebuilder and may recognize some or all of the amount earlier than the Company has done so under the current guidance. Revenue recognition under the new standard for real estate sales is largely based on the transfer of control provisions versus continuing involvement guidance. This may result in the Company applying more judgment in both identifying performance obligations and in determining the timing of recognizing revenue. With regard to the Company's development management services, the A&R DMA contains variable consideration in the form of incentive compensation. The ultimate amount of incentive compensation received by the Company is dependent on several factors, including determinants that are outside the control of the Company. Under the new guidance, the Company is required to estimate the amount of variable consideration expected to be received under the A&R DMA and may recognize incentive compensation revenue earlier than under the Company's current revenue recognition policy. The Company will also be required to provide more robust disclosure on the nature of the Company’s transactions, the economic substance of the arrangements and the judgments involved. The Company continues to evaluate the new standard to determine other possible impacts on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU requires that lessees recognize assets and liabilities for leases with lease terms greater than twelve months in the balance sheet and also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. This update is effective for public entities in fiscal years beginning after December 15, 2018, including interim reporting periods within those fiscal years. Early adoption is permitted. The Company is in the process of assessing the impact that the adoption of this ASU will have on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments 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.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) which amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of ASU No. 2016-15 is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The amendments add or clarify guidance on eight cash flow issues:
• Debt prepayment or debt extinguishment costs;
• Settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing;
• Contingent consideration payments made after a business combination;
• Proceeds from the settlement of insurance claims;
• Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies;
• Distributions received from equity method investees;
• Beneficial interests in securitization transactions; and
• Separately identifiable cash flows and application of the predominance principle.
For public entities, the guidance in ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the Emerging Issues Task Force) which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flow. The effective date of the standard is for fiscal years, and interim periods within those years, beginning after December 15, 2017 and should be retrospectively adopted. Early adoption is permitted. The Company expects to adopt this guidance on January 1, 2018. After adoption, the Company’s beginning-of-period and end-of-period total amounts shown on the statement of cash flows will include restricted cash and restricted cash equivalents.
In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost which amends the guidance for the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. ASU No. 2017-07 requires entities to report non-service-cost components of net periodic benefit cost outside of income from operations. The amendments are effective for interim and annual periods beginning after December 15, 2017. The adoption of ASU No. 2017-07 is not expected to materially impact the presentation of the Company’s consolidated statement of operations.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. ASU No. 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU No. 2017-09 is effective for annual periods beginning after December 15, 2017 and interim periods within those years. The amendments of ASU No. 2017-09 are to be applied prospectively to an award modified on or after the adoption date, consequently the impact will be dependent on whether the Company modifies any of its share-based payment awards and the nature of such modifications.
Recently adopted accounting pronouncements—In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business. ASU No. 2017-01 clarifies the definition of a business with the objective of addressing whether transactions should be accounted for as acquisitions of assets or of businesses. The Company early adopted ASU No. 2017-01 on July 1, 2017, and the standard will be applied to future transactions prospectively. Therefore, its impact will be dependent upon such transactions whereby the new definition of a business will be applied. Transaction costs for asset acquisitions will be capitalized while for business acquisitions such costs will be expensed.
3. ACQUISITIONS
On May 2, 2016, the Company completed the Formation Transactions pursuant to the Contribution and Sale Agreement (see Note 1), in which the Company acquired a controlling financial interest in the San Francisco Venture and the Management Company. The acquisitions and the Company’s concurrent investment in the Great Park Venture (see Note 4) transformed the Company into an owner, manager and developer of real estate at three
locations. In accordance with ASC 805, the Company has recorded the acquired assets (including identifiable intangible assets) and liabilities at their respective fair values as of the date of the Contribution and Sale Agreement.
The Company was a party to a cost sharing agreement related to the transactions that were consummated through the Contribution and Sale Agreement in which financial advisory, legal, accounting, tax and other consulting services were shared between the Company, the San Francisco Venture, the Great Park Venture and the Management Company. The Management Company acted as the administrative agent for all the parties. Transaction costs of $1.8 million were incurred directly by the Company or allocated to the Company under the cost sharing agreement during the nine months ended September 30, 2016, and are included in selling, general, and administrative expense in the accompanying condensed consolidated statements of operations.
The San Francisco Venture
On May 2, 2016, immediately prior to completion of the Formation Transactions, 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, LP ("Castlelake"). The principal terms of the Separation Agreement included the following:
• 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 is recorded, title to a parking structure parcel at Candlestick Point ("CP Parking Parcel") will be conveyed to CPHP and CPHP will assume the obligation to construct the parking structure and certain other improvements at Candlestick Point;
• CPHP was transferred the membership interest in Candlestick Retail Member, LLC, ("Mall Venture Member"), the entity that has 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 is to construct on the CP Parking Parcel;
• Once a final subdivision map is recorded, the San Francisco Venture will convey to the Mall Venture the property on which the Retail Project will be built (the "Retail Project Property"); and
• CPHP assumed all of the vertical construction loans and EB-5 loan liabilities of the San Francisco Venture, subject to a reimbursement agreement for the portion of the EB-5 loans that were used to fund development of the portion of The San Francisco Shipyard and Candlestick Point that was not transferred to CPHP.
Concurrent with and pursuant to the terms and conditions of the Contribution and Sale Agreement, the limited liability company agreement of the San Francisco Venture was amended and restated to reflect among other things (1) the conversion of the existing members’ interest into Class A units of the San Francisco Venture that are redeemable, at the holder’s option, subject to certain conditions, for Class A Common Units of the Operating Company, (2) the creation of Class B units of the San Francisco Venture and (3) the appointment of the Operating Company as the manager of the San Francisco Venture. In exchange for 378,578 of its Class A Common Units, the Operating Company acquired 378,578 Class A units of the San Francisco Venture that automatically converted into an equal number of Class B units of the San Francisco Venture. As the holder of all the outstanding Class B units of the San Francisco Venture, the Operating Company owns interests that entitle it to receive 99% of all distributions from the San Francisco Venture after the holders of Class A units of the San Francisco Venture have received distributions equivalent to the distributions, if any, paid on the Class A Common Units of the Operating Company. The Company has a controlling financial interest and consolidates the accounts of the San Francisco Venture and reports noncontrolling interest attributed to the outstanding Class A units of the San Francisco Venture.
The equity issued for the San Francisco Venture consisted of the following (in thousands, except unit and per unit amounts):
|
|
|
|
|
Class A Common Units in the Operating Company
|
378,578
|
|
Class A units at the San Francisco Venture exchangeable for Class A Common Units in the Operating Company
|
37,479,205
|
|
Total units issued/issuable in consideration
|
37,857,783
|
|
Estimated fair value per Class A Common Unit of the Operating Company
|
$
|
23.61
|
|
Total equity consideration
|
$
|
893,856
|
|
Add: contingent consideration
|
64,870
|
|
Less: capital commitment from seller
|
(120,000
|
)
|
Total consideration issued for the San Francisco Venture
|
$
|
838,726
|
|
The estimated fair value per Class A Common Unit of the Operating Company was determined using a discounted cash flow method projected for the Operating Company to determine a per unit enterprise value as of the acquisition date. As the Class A units of the San Francisco Venture are exchangeable on a one-for-one basis for Class A Common Units of the Operating Company, it was determined that the unit value of a Class A unit of the San Francisco Venture is substantially equal to the unit value of a Class A Common Unit of the Operating Company. The fair value of the noncontrolling interest represented by the Class A units of the San Francisco Venture held by affiliates of Lennar and Castlelake is calculated as the product of the unit value of the Class A units of the San Francisco Venture and the number of Class A units of the San Francisco Venture outstanding and redeemable for Class A Common Units of the Operating Company.
Contingent consideration consists of the San Francisco Venture’s obligation (through a subsidiary) to convey the Retail Project Property to the Mall Venture and the CP Parking Parcel to CPHP. The Retail Project Property is to be conveyed pursuant to a development and acquisition agreement, dated November 13, 2014, between the Mall Venture and the San Francisco Venture’s subsidiary (the "Mall DAA"). The former owners of the San Francisco Venture retained the rights to 49.9% of the equity ownership in the Mall Venture through the Separation Agreement; therefore, the conveyance of the Retail Project Property to the Mall Venture represents additional consideration to the former owners, contingent upon the San Francisco Venture obtaining the appropriate governmental approvals required to subdivide and convey the Retail Project Property.
In connection with the Separation Transaction, the former owners agreed to make an aggregate capital commitment to the San Francisco Venture of $120 million, payable to the San Francisco Venture in four equal installments, with the first installment paid on May 2, 2016 and the second, third and fourth installments payable within 90, 180 and 270 days thereafter. The second and third installments were paid and received by the San Francisco Venture on August 5, 2016 and November 3, 2016, respectively, and the fourth installment was received on February 2, 2017. The $120 million capital commitment from the selling members was determined to be an adjustment to purchase consideration since the amount is a cash inflow to the Company from the former owners of the San Francisco Venture in relation to the acquisition, thereby reducing the fair value of the consideration.
The estimated fair value of the assets acquired and liabilities assumed, as well as the fair value of the noncontrolling interest in the San Francisco Venture as of the acquisition date, is as follows (in thousands):
|
|
|
|
|
Assets acquired:
|
|
Inventories
|
$
|
1,038,154
|
|
Other assets
|
827
|
|
Liabilities assumed:
|
|
Macerich Note
|
(65,130
|
)
|
Accounts payable
|
(17,715
|
)
|
Related party liabilities
|
(117,410
|
)
|
Net assets acquired
|
$
|
838,726
|
|
Adjustment to equity consideration, net (see table above)
|
55,130
|
|
|
$
|
893,856
|
|
Noncontrolling interest in the San Francisco Venture
|
$
|
884,917
|
|
Inventories consist of land held for development and the right to receive land from the Office of Community Investment and Infrastructure, the Successor to the Redevelopment Agency of the City and County of San Francisco (the "San Francisco Agency") in accordance with a disposition and development agreement between the San Francisco Venture’s subsidiary and the San Francisco Agency.
Accounts payable consists of payables related to normal business operations. Related party liabilities consist of (i) $102.7 million in EB-5 loan reimbursements to CPHP or its subsidiaries, pursuant to reimbursement agreements that the San Francisco Venture entered into as of May 2, 2016 to reimburse CPHP or its subsidiaries for the proceeds of the EB-5 loans that were used to fund development of the portion of The San Francisco Shipyard and Candlestick Point that were not transferred to CPHP; and (ii) $14.6 million closing cash adjustment payable to CPHP (see Note 10). The Macerich Note is a $65.1 million loan from an affiliate of the Macerich Member that will be extinguished upon contribution of land currently held by the San Francisco Venture to the Mall Venture (see Note 11).
Management Company
The Management Company was formed in 2009 as a joint venture between Emile Haddad and an affiliate of Lennar. Since being formed, the Management Company has been engaged by the Company as an independent contractor to supervise the day-to-day affairs of the Company and the assets of its subsidiaries. The Company awarded the Management Company a 2.48% ownership interest in the Company’s subsidiary FPL in connection with its engagement as development manager as well as a seat on the Company’s Board of Managers prior to the Formation Transactions. The Management Company has also acted as development manager for the Great Park Venture, under the terms of the development management agreement. Prior to the Formation Transactions, the Management Company also held an ownership interest in the Great Park Venture through an investment in a joint venture with an affiliate of Castlelake ("FPC-HF Venture I"). In 2014, the Management Company sold the rights to 12.5% of all incentive compensation under the development management agreement to FPC-HF Venture I in exchange for its ownership interest in FPC-HF Venture I. Concurrent with and pursuant to the terms and conditions of the Contribution and Sale Agreement, the Management Company amended and restated its limited partnership agreement. Among other things, the principal organizational changes that occurred were as follows:
• Distribution of the Management Company’s ownership interest in FPC-HF Venture I (see Note 4), to its selling shareholders, Emile Haddad and an affiliate of Lennar;
• The partnership interests were converted into two classes of partnership interests, designated as Class A interests and Class B interests. Holders of the Management Company’s Class B interests are entitled to receive distributions from the Management Company equal to the amount of any incentive compensation payments the Management Company receives under the A&R DMA characterized as "Legacy Incentive Compensation." Holders of Class A interests are entitled to all other distributions; and
• Admission of FPC-HF Venture I as a 12.5% holder of the Management Company’s Class B interests in exchange for FPC-HF Venture I’s contribution of its right to 12.5% of the Legacy Incentive Compensation, as defined and discussed in Note 10.
By acquiring all of the stock of Five Point Communities Management, Inc. and all of the Class A interests of Five Point Communities, LP, the Company obtained a controlling financial interest in the Management Company and is able to direct all business decisions of the Management Company.
The equity issued for the Management Company, consisted of the following (in thousands, except unit/share and per unit amounts):
|
|
|
|
|
Class A common shares of the Company
|
798,161
|
|
Class A Common Units of the Operating Company
|
6,549,629
|
|
Total units/shares issued in consideration
|
7,347,790
|
|
Estimated fair value per Class A Common Unit of the Operating Company and Class A common share of the Company
|
$
|
23.61
|
|
Total equity consideration
|
$
|
173,488
|
|
Add: available cash distribution
|
450
|
|
Total consideration issued for the Management Company
|
$
|
173,938
|
|
A Class A common share of the Company and a Class A Common Unit of the Operating Company issued as consideration were each valued at $23.61.
The estimated total purchase price was allocated to Management Company’s assets and liabilities based upon fair values as determined by the Company, as follows (in thousands):
|
|
|
|
|
Assets acquired:
|
|
Investment in FPL
|
$
|
70,000
|
|
Intangible asset
|
129,705
|
|
Cash
|
3,664
|
|
Legacy Incentive Compensation receivable from related party
|
56,232
|
|
Related party receivables
|
5,282
|
|
Prepaid expenses and other current assets
|
328
|
|
Liabilities assumed:
|
|
Other liabilities
|
(2,397
|
)
|
Related party liabilities
|
(81,996
|
)
|
Accrued employee benefits
|
(6,880
|
)
|
Net assets acquired
|
$
|
173,938
|
|
The intangible asset is a contract asset resulting from the incentive compensation provisions of the A&R DMA. The A&R DMA has an original term commencing on December 29, 2010 and ending on December 31, 2021, with options to renew 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 investment in FPL, which was stepped up to fair value, will eliminate in consolidation as FPL is a consolidated subsidiary of the Company. Related party liabilities are comprised of the Class B distribution rights held by Emile Haddad, an affiliate of Lennar and FPC-HF Venture I. The Class B interests were determined to not be a substantive form of equity because the interests only entitle the holders to the Legacy Incentive Compensation payments, and does not expose the holders to the net assets or residual interest of Management Company. Class B distributions will be made when the Management Company receives Legacy Incentive Compensation payments under the A&R DMA. As of September 30, 2017, the Management Company had received $58.3 million of the Legacy Incentive Compensation and made distributions in the same amount to the holders of Class B interests. Related party liabilities also includes an obligation to the Operating Company for $14.1 million representing 12.5% of the Non-Legacy Incentive
Compensation under the A&R DMA that the Management Company previously sold to FPC-HF Venture I and that the Operating Company acquired from FPC-HF Venture I in connection with the Contribution and Sale Agreement (see Note 10). This obligation and the Operating Company’s acquired asset are eliminated in the accompanying condensed consolidated balance sheet as of September 30, 2017.
The Company recorded revenue and losses related to the acquisition of the Management Company and the San Francisco Venture for the three and nine months ended September 30, 2017 and 2016 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenue
|
$
|
6,356
|
|
|
$
|
5,736
|
|
|
$
|
101,365
|
|
|
$
|
9,180
|
|
Loss
|
$
|
(4,015
|
)
|
|
$
|
(3,336
|
)
|
|
$
|
(7,998
|
)
|
|
$
|
(6,104
|
)
|
Pro Forma Information
The pro forma financial information presents combined results of operations for the nine months ended September 30, 2016, as if the Management Company and the San Francisco Venture had been acquired as of the beginning of fiscal year 2015. Nonrecurring pro forma adjustments directly attributable to the business combination include (i) share based compensation of $20.5 million, (ii) bonus expense of $12.0 million, and (iii) transaction costs of $3.3 million of which $1.8 million is recorded in the historical statement of operations. These costs were excluded from the pro forma earnings for the nine month period ended September 30, 2016. The pro forma data presented below is for informational purposes only and is not necessarily indicative of the consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal year 2015 or of the results of future operations of the combined business. The pro forma revenue and net loss for the nine months ended September 30, 2016 are as follows (in thousands):
|
|
|
|
|
|
Nine Months Ended
September 30, 2016
|
Pro forma revenues
|
$
|
29,364
|
|
Pro forma net loss
|
$
|
(55,718
|
)
|
4. INVESTMENT IN UNCONSOLIDATED ENTITIES
Great Park Venture
On May 2, 2016, concurrent with and pursuant to the terms and conditions of the Contribution and Sale Agreement, the Great Park Venture amended and restated its limited liability company agreement. The main organizational change that occurred was the split of the previous interests in Great Park Venture into two classes of interests—"Percentage Interests" and "Legacy Interests." The pre-Formation Transaction owners of Great Park Venture retained the Legacy Interests, which entitle them to receive priority distributions in an aggregate amount equal to $476 million and up to an additional $89 million from subsequent distributions of cash depending on the performance of the Great Park Venture. In November 2017, the Great Park Venture made the first distribution to the holders of Legacy Interests in the aggregate amount of $120 million. The holders of the Percentage Interests will receive all other distributions. Pursuant to the Contribution and Sale Agreement, the Operating Company acquired 37.5% of the Percentage Interests in exchange for issuing 17,749,756 Class A Common Units in the Operating Company to an affiliate of Lennar and to FPC-HF Venture I. Great Park Venture is the owner of Great Park Neighborhoods, a mixed-use, master planned community located in Orange County, California. The Company, through its acquisition of the Management Company, has been engaged to manage the planning, development and sale of the Great Park Neighborhoods and supervise the day-to-day affairs of the Great Park Venture.
The cost of the Company’s investment in the Great Park Venture was $114.2 million higher than the Company’s underlying equity in the carrying value of net assets of the Great Park Venture (basis difference). The basis difference at September 30, 2017 was $115.0 million. The Company’s earnings from the equity method investment are adjusted by amortization and accretion of the basis differences as the assets 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 nine months ended September 30, 2017 and for the period from the acquisition date of May 2, 2016 to September 30, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Land sale revenues
|
$
|
465,416
|
|
|
$
|
18,297
|
|
Cost of land sales
|
(328,871
|
)
|
|
(10,416
|
)
|
Other costs and expenses
|
(23,060
|
)
|
|
(75,013
|
)
|
Net income (loss) of Great Park Venture
|
$
|
113,485
|
|
|
$
|
(67,132
|
)
|
The Company’s share of net income (loss)
|
$
|
42,557
|
|
|
$
|
(25,175
|
)
|
Basis difference (amortization) accretion
|
(24,835
|
)
|
|
24,696
|
|
Equity in earnings (loss) from Great Park Venture
|
$
|
17,722
|
|
|
$
|
(479
|
)
|
The following table summarizes the balance sheet data of the Great Park Venture and the Company’s investment balance as of September 30, 2017 and December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Inventories
|
$
|
1,041,195
|
|
|
$
|
1,115,818
|
|
Cash and cash equivalents
|
530,259
|
|
|
351,469
|
|
Receivable and other assets
|
25,349
|
|
|
28,815
|
|
Total assets
|
$
|
1,596,803
|
|
|
$
|
1,496,102
|
|
Accounts payable and other liabilities
|
$
|
177,363
|
|
|
$
|
190,148
|
|
Redeemable Legacy Interests
|
565,000
|
|
|
565,000
|
|
Capital (Percentage Interest)
|
854,440
|
|
|
740,954
|
|
Total liabilities and capital
|
$
|
1,596,803
|
|
|
$
|
1,496,102
|
|
The Company's share of capital in Great Park Venture
|
$
|
320,415
|
|
|
$
|
277,858
|
|
Unamortized basis difference
|
115,039
|
|
|
139,874
|
|
The Company’s investment in the Great Park Venture
|
$
|
435,454
|
|
|
$
|
417,732
|
|
Gateway Commercial Venture
On August 4, 2017, the Company entered into the Limited Liability Company Agreement of Five Point Office Venture Holdings I, LLC, a Delaware limited liability company (the "Gateway Commercial Venture"), made a capital contribution of $106.5 million to the Gateway Commercial Venture, and received a 75% interest in the venture. 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.
On August 10, 2017, through its wholly owned subsidiaries, the Gateway Commercial Venture completed the purchase of the Five Point Gateway Campus located in Irvine, California. The purchase price of $443.0 million was funded using capital contributions by the members of the Gateway Commercial Venture and $291.2 million in debt financing. The financing arrangement also provides for an additional $48.0 million to be borrowed for the cost of tenant improvements, leasing expenditures and certain capital expenditures. The debt obtained by the Gateway Commercial Venture is non-recourse to the Company other than in the case of customary "bad act" or bankruptcy or insolvency events. The Company's equity in loss from the Gateway Commercial Venture for the three months ended September 30, 2017 was $0.1 million, and the Company's investment balance in the Gateway Commercial Venture as of September 30, 2017 was $106.4 million.
5. NONCONTROLLING INTERESTS
As of September 30, 2017, the Holding Company owned approximately 58.6% of the outstanding Class A Common Units of the Operating Company, 100% of the outstanding Class B Common Units, and was the sole operating managing member 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 41.4% 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, except for 7,142,857 units purchased by Lennar on May 15, 2017, as to which such right is exercisable after May 15, 2018.
The San Francisco Venture has two classes of units—Class A units and Class B 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 and affiliates of 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.
Net (loss) income attributable to the noncontrolling interests on the consolidated statements of operations represents the portion of earnings attributable to the economic interest in the Company held by the noncontrolling interests. The Company allocates (loss) income to noncontrolling interests based on the substantive profit sharing provisions of the applicable operating agreements.
With each exchange of Class A Common Units of the Operating Company for Class A common shares, the Holding Company's percentage ownership interest in the Operating Company and its share of the Operating Company’s cash distributions and profits and losses will increase (see Note 6). 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 equity 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 nine months ended September 30, 2017, the Holding Company's ownership interest in the Operating Company changed as a result of the Holding Company acquiring Class A Common Units of the Operating Company with the proceeds of the Holding Company's IPO, the sale of Class A Common Units of the Operating Company in a private placement with Lennar, and equity transactions related to the Company's share based compensation plan. The carrying amount of the Company's noncontrolling interest has been adjusted by $3.7 million to reflect these changes in ownership interests during the nine months ended September 30, 2017. As a result of changes in ownership interest of the Operating Company due to the Formation Transactions, an adjustment to members' capital of $119.6 million occurred during the nine months ended September 30, 2016.
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 TRA related obligation, which was $258.1 million and $201.8 million at September 30, 2017 and December 31, 2016, respectively. The Operating Company has investments in and consolidates the assets and liabilities of the San Francisco Venture, Five Point Communities, LP and FPL, all of which have also been determined to be VIEs.
The San Francisco Venture is a VIE as the limited partners (or functional equivalent) 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 September 30, 2017, the San Francisco Venture had total combined assets of $1,050.6 million, primarily comprised of $1,047.2 million of inventories, $0.1 million in related party assets and $1.6 million in cash and total combined liabilities of $259.8 million including $177.4 million in related party liabilities and $65.1 million in notes payable.
As of December 31, 2016, the San Francisco Venture had total combined assets of $1,134.2 million, primarily comprised of $1,080.1 million of inventories, $30.1 million in related party assets and $22.1 million in cash and total combined liabilities of $250.4 million including $167.6 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 did not guarantee any debt of the San Francisco Venture.
Five Point Communities, LP and FPL are VIEs as in each case the limited partners (or functional equivalent) have disproportionately fewer voting rights and substantially all of the activities of the entities are conducted on behalf of the limited partners and their related parties. The Operating Company, or a wholly owned subsidiary of the Operating Company, is the primary beneficiary of Five Point Communities, LP and FPL.
As of September 30, 2017, Five Point Communities, LP and FPL had combined assets of $527.4 million, primarily comprised of $345.0 million of inventories, $127.6 million of intangibles, $4.2 million in related party assets and $11.7 million in cash, and total combined liabilities of $138.8 million, including $124.6 million in accounts payable and other liabilities and $9.6 million in related party liabilities.
As of December 31, 2016, Five Point Communities, LP and FPL had combined assets of $520.6 million, primarily comprised of $280.4 million of inventories, $127.6 million of intangibles, $51.0 million in related party assets and $22.6 million in cash, and total combined liabilities of $138.5 million, including $80.6 million in accounts payable and other liabilities and $53.6 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 nine months ended September 30, 2017 and 2016, respectively, there were no VIEs that were deconsolidated.
7. PROPERTIES AND EQUIPMENT— NET
Properties and equipment as of September 30, 2017 and December 31, 2016, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31, 2016
|
Agriculture operating properties and equipment
|
$
|
29,667
|
|
|
$
|
29,636
|
|
Golf club operating properties
|
5,616
|
|
|
5,611
|
|
Other
|
4,855
|
|
|
5,002
|
|
Total properties and equipment
|
40,138
|
|
|
40,249
|
|
Accumulated depreciation
|
(6,542
|
)
|
|
(5,840
|
)
|
Properties and equipment—net
|
$
|
33,596
|
|
|
$
|
34,409
|
|
Depreciation expense was $0.2 million and $0.3 million for the three months ended September 30, 2017 and 2016, respectively, and $0.8 million and $0.7 million for the nine months ended September 30, 2017 and 2016, respectively.
8. INTANGIBLE ASSET—RELATED PARTY
In connection with the Company’s acquisition of the Management Company (see Note 3), the Company acquired an intangible asset related to the contract value of the incentive compensation provisions of the Management Company’s development management agreement with the Great Park Venture. The carrying amount and accumulated amortization of the intangible asset as of September 30, 2017 and December 31, 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31, 2016
|
Gross carrying amount
|
$
|
129,705
|
|
|
$
|
129,705
|
|
Accumulated amortization
|
(2,112
|
)
|
|
(2,112
|
)
|
Net book value
|
$
|
127,593
|
|
|
$
|
127,593
|
|
No amortization expense was recorded for the three or nine months ended September 30, 2017, as the Company did not receive any economic benefits from incentive compensation. For the three and nine months ended September 30, 2016, the Company recorded $0.9 million and $1.5 million, respectively, of amortization expense attributed to a portion of the Legacy Incentive Compensation recognized in the respective periods.
9. MARKETABLE SECURITIES—HELD TO MATURITY
The Company's investments in marketable securities is comprised of debt securities that are carried at amortized cost and are classified as "held to maturity" as the Company purchases the investments with the intent and ability to hold each investment until maturity. The cost of debt securities are adjusted for amortization of premiums and accretion of discounts to maturity, using the effective interest method or a method that approximates the effective interest method. Amortization and accretion is included in selling, general, and administrative costs and expenses in the accompanying condensed consolidated statements of operations. At September 30, 2017, the Company had no investments in marketable securities.
At December 31, 2016, investments in debt securities classified as held to maturity were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Gross Unrecognized Holding Gains
|
|
Gross Unrecognized Holding Losses
|
|
Fair Value (Level 1)
|
Security type:
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
20,577
|
|
|
$
|
—
|
|
|
$
|
(52
|
)
|
|
$
|
20,525
|
|
At December 31, 2016, no debt securities had been in a continuous unrealized loss position for 12 months or longer.
10. RELATED PARTY TRANSACTIONS
Related party assets and liabilities included in the Company’s condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31, 2016
|
Assets:
|
|
|
|
Capital commitment from seller
|
$
|
—
|
|
|
$
|
30,000
|
|
Legacy Incentive Compensation receivable
|
—
|
|
|
43,101
|
|
Transition services agreement
|
—
|
|
|
1,356
|
|
Builder fees and other
|
4,428
|
|
|
7,954
|
|
|
$
|
4,428
|
|
|
$
|
82,411
|
|
Liabilities:
|
|
|
|
EB-5 loan reimbursements
|
$
|
102,692
|
|
|
$
|
102,692
|
|
Contingent consideration—Mall Venture project property
|
64,870
|
|
|
64,870
|
|
Deferred land sale revenue
|
9,860
|
|
|
—
|
|
Payable to holders of Management Company’s Class B interests
|
9,000
|
|
|
52,102
|
|
Other
|
712
|
|
|
1,493
|
|
|
$
|
187,134
|
|
|
$
|
221,157
|
|
Capital Commitment from Seller
In connection with the Separation Transaction, the selling shareholders of the San Francisco Venture, affiliates of Lennar and Castlelake, made a capital commitment of $120 million, payable to the San Francisco Venture in four equal installments, with the first installment paid on May 2, 2016 and the second, third and final installments payable within 90, 180 and 270 days thereafter. The final installment of $30 million was received in February 2017.
Development Management Agreement with the Great Park Venture (Legacy Incentive Compensation Receivable)
In 2010, the Great Park Venture, the Company’s equity method investee through the Formation Transactions, engaged the Management Company under a development management agreement to provide management services to the Great Park Venture. The compensation structure now in place as per the A&R DMA consists of a base fee and incentive compensation. The base fee consists of a fixed annual fee and a variable fee equal to general and administrative costs incurred by the Management Company on behalf of the Great Park Venture. Incentive compensation is characterized as "Legacy Incentive Compensation" and "Non-Legacy Incentive Compensation." The Legacy Incentive Compensation consists of the following: (i) $15.2 million, which was received by the Management Company on May 2, 2016; (ii) $43.1 million received by the Management Company on January 3, 2017; and (iii) a maximum of $9 million of incentive compensation payments attributed to contingent payments made under a cash flow participation agreement the Great Park Venture is a party to. Generally, the Non-Legacy Incentive Compensation is 9% of distributions made by the Great Park Venture, as defined in the A&R DMA, excluding the distributions to the holders of Legacy Interests of $565 million (see Note 4). Due to the contingencies associated with the portion of the Legacy Incentive Compensation (maximum of $9 million) that has not been received and the Non-Legacy Incentive Compensation, no receivable was recognized at the acquisition date for these components and instead an intangible asset at fair value, was recognized at the acquisition date (see Note 3). For the three and nine months ended September 30, 2017, the Company recognized revenue from management services of $3.9 million and $12.0 million, respectively, included in management services—related party in the accompanying condensed consolidated statement of operations related to all management fees under the A&R
DMA. For the three and nine months ended September 30, 2016, the Company recognized $4.1 million and $6.8 million, respectively, related to all management fees under the A&R DMA.
EB-5 Loan Reimbursements
The San Francisco Venture has entered into reimbursement agreements for which it has agreed to reimburse CPHP or its subsidiaries for a portion of the EB-5 loan liabilities and related interest that were assumed by CPHP or its subsidiaries pursuant to the Separation Agreement. As of September 30, 2017, the balance of the payable to CPHP or its subsidiaries was $102.7 million. Interest is paid monthly and totaled $1.1 million and $3.2 million for the three and nine months ended September 30, 2017, respectively, and $1.1 million and $1.8 million for the three and nine months ended September 30, 2016, respectively. All of the incurred interest for the three and nine months ended September 30, 2017 and 2016 was capitalized into inventories as interest on development and construction costs. The weighted average interest rate as of September 30, 2017 was 4.1%. Principal payments of $39.4 million and $63.3 million are due in 2019 and 2020, respectively.
Contingent Consideration to Class A Members of the San Francisco Venture
Under the terms of the Separation Agreement, the San Francisco Venture retained the obligation under the Mall DAA to subdivide and convey the Retail Project Property to the Mall Venture and the former owners of the San Francisco Venture retained the rights to 49.9% of the equity ownership in the Mall Venture. The obligation to convey the Retail Project Property to the Mall Venture represents additional consideration as the conveyance of the Retail Project Property provides direct benefit to the former owners. After conveyance of the Retail Project Property to the Mall Venture and the CP Parking Parcel to CPHP, the contingent consideration liability and the Macerich Note (see Note 11) will be derecognized when the Company determines it no longer has a continuing involvement in the conveyed parcels.
Contingent consideration is carried at fair value and is remeasured on a recurring basis. The Company uses level 3 inputs to measure the estimated fair value of the contingent consideration arrangement based on the expected cash flows considering the use of the underlying property subject to the arrangement. The estimated cash flows are affected by estimates and assumptions related to development costs, retail rents, occupancy rates and continuing operating expenses.
Payables to Holders of Management Company’s Class B Interests
Holders of the Management Company’s Class B interests (an affiliate of Lennar, Emile Haddad, and FPC-HF Venture I) are entitled to receive all distributions from the Management Company that are attributable to any Legacy Incentive Compensation received by the Management Company. The Management Company made a $43.1 million payment to the holders of Class B interests of the Management Company in January 2017 in connection with the Management Company’s January 2017 collection of Legacy Incentive Compensation in the same amount.
Separation Agreement—Closing Cash Adjustment
The Separation Agreement contains a provision for a final accounting to be performed subsequent to closing in which certain expenditures incurred by the San Francisco Venture prior to the closing are allocated between CPHP and the San Francisco Venture. Per the terms of the closing cash adjustment provision, the Company recorded a related party liability for the closing cash adjustment on May 2, 2016 and paid the full obligation of $14.6 million to CPHP in July 2016.
Transition Services Agreement
The Operating Company has engaged a subsidiary of Lennar to provide certain services, support, and resources to the Company under a Transition Services Agreement ("TSA"). The services include the following: (i) secondment of certain Lennar subsidiary employees to the Company from May 2, 2016 to July 1, 2016; (ii) licensing the use of certain office space; and (iii) transition services including accounting, payroll, finance, treasury, tax, employee
benefits, human resources, and information technology support. The fees charged by subsidiaries of Lennar for transition services approximate the costs incurred by Lennar and its subsidiaries in providing such services and may be revised accordingly. The TSA will terminate on May 2, 2018 unless extended by written mutual agreement. For the three and nine months ended September 30, 2017, the Company incurred $0.4 million and $1.3 million, respectively, in costs for office space licensing and transition services. For the three and nine months ended September 30, 2016, the Company incurred $0.4 million and $0.5 million, respectively, in office space licensing and transition services expenses. As of September 30, 2017 and December 31, 2016, the Company had a related party payable of $0.2 million and a related party receivable of $1.4 million, respectively, related to the various components of the TSA.
San Francisco Bay Area Development Management Agreements
The Company has entered into development management agreements with affiliates of Lennar and Castlelake in which the Company will provide certain development management services to various real estate development projects located in the San Francisco Bay area. The agreements generally consist of a fixed management fee and in some cases a variable fee equal to general and administrative costs incurred by the Company. For the three and nine months ended September 30, 2017, the Company recognized revenue from management services of $1.5 million and $4.4 million, respectively. During the three and nine months ended September 30, 2016, the Company recognized $1.4 million and $2.1 million, respectively, in such revenues. Revenues related to management fees under the San Francisco Bay area development management agreements are included in management services—related party in the accompanying condensed consolidated statements of operations.
Candlestick Point Purchase and Sale Agreements
The San Francisco Venture has entered into purchase and sale agreements with an affiliate of Lennar and Castlelake to sell 3.6 acres of land including one agreement for land where up to 390 for-sale homesites are planned to be built and one agreement for land that includes additional airspace parcels above the planned Retail Project where up to 334 multi-family homesites are planned to be built. The Company is required to complete certain conditions prior to the close of escrow of the sale of the airspace parcels above the planned Retail Project, including recording the subdivision of the land and airspace parcels into separate legal parcels. The San Francisco Venture closed escrow on the first of these two sales in January 2017 resulting in gross proceeds of $91.4 million. As of September 30, 2017, the Company has deferred $9.9 million of revenue on this sale that will be recognized as the Company completes certain infrastructure improvements.
Entitlement Transfer Agreement
In December 2016, the San Francisco Venture entered into an agreement with an affiliate of Lennar and Castlelake pursuant to which an affiliate of Lennar and Castlelake agreed to transfer to the San Francisco Venture entitlements for the right to construct (1) at least 172 homesites (or, if greater, the number of entitled homesites that are not developed or to be developed by or on behalf of the San Francisco Agency or by residential developers on the land transferred to CPHP) and (2) at least 70,000 square feet of retail space (or, if greater, the amount of entitled retail space that is not developed or to be developed by or on behalf of the San Francisco Agency or by commercial developers on the land transferred to CPHP) for use in the development of other portions of The San Francisco Shipyard and Candlestick Point.
Builder Fees
In the normal course of business, the Company enters into purchase and sale agreements with related parties. The Company is a party to such purchase and sale agreements in which the related party homebuilder is obligated to pay the Company certain fees when obtaining a building permit. In some cases, the fees are passed through to local school districts or other government agencies or, in other cases, when the Company has previously satisfied the obligation directly with the local school district or other government agency, the fees are retained by the Company.
Development Management Agreement between FPL and the Management Company
The Company previously engaged the Management Company as an exclusive independent contractor to generally supervise the day-to-day affairs of the Company and the assets of its subsidiaries. The initial term of the management agreement commenced on July 31, 2009, and was for five years, with an option for two renewal terms of three years each. The Company elected to exercise the first renewal option in 2014. The development management fee was $5.0 million per annum in each renewal term, subject to annual increases determined by a consumer price index. The management agreement was terminated on May 2, 2016 when the Company acquired the Management Company. For the nine months ended September 30, 2016, development management fees were $1.7 million.
11. NOTES PAYABLE
At September 30, 2017 and December 31, 2016, notes payable consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31, 2016
|
Macerich Note
|
$
|
65,130
|
|
|
$
|
65,130
|
|
Settlement Note, net of unamortized discount of $340 in 2017 and $743 in 2016
|
4,660
|
|
|
4,257
|
|
|
$
|
69,790
|
|
|
$
|
69,387
|
|
On November 13, 2014, in connection with entering into the Mall Venture and Mall DAA, a wholly-owned subsidiary of the San Francisco Venture issued a promissory note (the "Macerich Note") to an affiliate of the Macerich Member in the amount of $65.1 million, bearing interest at 360-day LIBOR plus 2.0% (3.78% at September 30, 2017). Upon completion of certain conditions, including the conveyance of the Retail Project Property to the Mall Venture, the Macerich Member, in several steps, will cause the Macerich Note to be distributed to the Company, resulting in the extinguishment of the Macerich Note. Alternatively, under the terms of the Mall Venture and Mall DAA, if the San Francisco Venture or the Lennar-CL Venture fail to achieve certain milestones, including the conveyance to the joint venture of the land for the mall on or prior to December 31, 2017, subject to certain extensions, Macerich will have the right to terminate the joint venture, require the Company to repay the Macerich Note and 50% of certain additional termination fees (the remainder would be paid by the Lennar-CL Venture). The Mall Venture is currently redesigning the Retail Project and evaluating certain milestones, including the timing of the conveyance to the Mall Venture of the land for the mall. At the acquisition date of May 2, 2016, the Company recorded the Macerich Note at its fair value. The Company currently does not accrue interest on the Macerich Note given the extinguishment terms noted above. The Company deems the possibility of repayment remote.
The settlement note represents the settlement of an April 2011 third party dispute related to a prior land acquisition in which the Company issued a $12.5 million non-interest-bearing promissory note. At issuance, the Company recorded a discount on the face value of the promissory note at an imputed interest rate of approximately 12.8%. Amortization expense of this discount is capitalized to the Company’s inventory each period. During the three months ended September 30, 2017 and 2016, the Company capitalized amortization expense of $0.1 million and $0.2 million, respectively. During the nine months ended September 30, 2017 and 2016, the Company capitalized amortization expense of $0.4 million and $0.6 million, respectively. The Company made a $5.0 million principal payment in April 2016 and as of September 30, 2017, the settlement note has one remaining principal paydown of $5.0 million due April 2018. The settlement note is secured by certain real estate assets of the Company with a carrying value of approximately $24.8 million and $24.3 million, at September 30, 2017 and December 31, 2016, respectively.
Revolving Credit Facility
In April 2017, the Company entered into a $50 million senior unsecured revolving credit facility (the "Revolving Credit Facility") with a financial institution. The Revolving Credit Facility provides for borrowings and issuances of letters of credit in an aggregate amount of up to $50 million initially, with an accordion feature that will allow the Company to increase the maximum aggregate amount to $100 million, subject to certain conditions, including
receipt of commitments. The Revolving Credit Facility matures in two years, with two options for the Company to extend the maturity date, in each case, by an additional year, subject to the satisfaction of certain conditions including the approval of the administrative agent and lenders. Borrowings under the Revolving Credit Facility bear interest at LIBOR plus a margin ranging from 1.75% to 2.00% based on the Company’s leverage ratio. No funds have been drawn on the Revolving Credit Facility as of September 30, 2017.
On November 8, 2017, the Company entered into an amendment to the Revolving Credit Facility (the "Revolving Credit Facility Amendment") which, among other things, increased the aggregate commitments under the Revolving Credit Facility from $50 million to $125 million and extended the maturity date of the revolving credit facility from April 2019 to April 2020, with one option to extend the maturity date by an additional year, subject to the satisfaction of certain conditions including the approval of the administrative agent and lenders. Borrowings continue to bear interest at LIBOR plus a margin ranging 1.75% to 2.00% based on the Company's leverage ratio.
12. TAX RECEIVABLE AGREEMENT
Simultaneous with, but separate and apart from the Formation Transactions on May 2, 2016, the Company entered into 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"). The TRA provides for payment by the Company to the TRA Parties or their successors of 85% of the amount of cash savings, if any, in income tax the Company realizes as a result of:
(a) Increases in the Company’s tax basis attributable to exchanges of Class A Common Units of the Operating Company for Class A common shares of the Company or cash or certain other taxable acquisitions of equity interests by the Operating Company.
After a 12 month holding period, holders of Class A Common Units of the Operating Company will be able to exchange their units for, at the Company's option, either 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 cash in an amount equal to the market value of such shares at the time of exchange. The Company expects that basis adjustments resulting from these transactions, if they occur, are likely to reduce the amount of income tax the Company would otherwise be required to pay in the future.
(b) Allocations that result from the application of the principles of Section 704(c) of the Internal Revenue Code of 1986, as amended (the "Code").
Section 704(c) of the Code, and the U.S. Treasury regulations promulgated thereunder, require that items of income, gain, loss and deduction that are attributable to the Operating Company’s directly and indirectly held property, including property contributed to the Operating Company pursuant to the Formation Transactions and the property held by the Operating Company prior to the Formation Transactions, must be allocated among the members of the Operating Company to take into account the difference between the fair market value and the adjusted tax basis of such assets on May 2, 2016. As a result, the Operating Company will be required to make certain special allocations of its items of income, gain, loss and deduction that are attributable to such assets. These allocations, like the increases in tax basis described above, are likely to reduce the amount of income tax the Company would otherwise be required to pay in the future.
(c) Tax benefits related to imputed interest or guaranteed payments deemed to be paid or incurred by the Company as a result of the TRA.
At September 30, 2017 and December 31, 2016, respectively, the Company’s condensed consolidated balance sheets include a $258.1 million and a $201.8 million liability 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) of the Code to be probable and estimable when an event occurs that results in the Company measuring the Operating Company’s direct 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 additional 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 additional liabilities under the TRA 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. During the nine months ended September 30, 2017, the Company adjusted its recorded TRA liability as a result of equity transactions during the period, including the IPO and private placement. Changes in the Company's estimates of the utilization of its deferred tax attributes and tax rates in effect may also result in subsequent changes to the amount of TRA liabilities recorded.
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 nine months ended September 30, 2017 and 2016.
13. 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.
Operating Leases
The Company has entered into agreements to lease certain office facilities and equipment under operating leases. The Company also leases portions of its land to third parties for agricultural operations. In August 2017, the Company entered into a 130-month full service gross lease with the Gateway Commercial Venture, a related party, and upon completion of tenant improvements, the lease will commence and the Company will relocate its Orange County, California offices to the newly leased office space at the Five Point Gateway Campus. As of September 30, 2017, minimum lease payments to be made under operating leases with initial terms in excess of one year and minimum lease payments to be received under noncancelable leases are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Rental
Payments
|
|
Rental
Receipts
|
Remainder of 2017
|
|
$
|
765
|
|
|
$
|
267
|
|
2018
|
|
2,926
|
|
|
1,094
|
|
2019
|
|
5,016
|
|
|
827
|
|
2020
|
|
5,267
|
|
|
701
|
|
2021
|
|
5,249
|
|
|
—
|
|
Thereafter
|
|
19,706
|
|
|
—
|
|
|
|
$
|
38,929
|
|
|
$
|
2,889
|
|
Rent expense for the three months ended September 30, 2017 and 2016 was $0.6 million and $0.7 million, respectively, and for the nine months ended September 30, 2017 and 2016, rent expense was $1.9 million and $1.4 million, respectively.
Newhall Ranch Project Approval Settlement
In September 2017, the Company reached a settlement (the "Newhall Settlement") with key national and state environmental and Native American organizations that were petitioners (the "Settling Petitioners") in various legal challenges to Newhall Ranch's regulatory approvals and permits (see Legal Proceedings below). The Settling Petitioners have agreed to (a) dismiss all pending claims regarding regulatory approvals and permits, (b) not oppose pending and certain future regulatory approvals, and (c) not seek protections for certain species of plants and
animals under federal and state endangered species acts for specified time periods. The Company has agreed to fund certain environmental and cultural investments and protections at the Newhall Ranch project and surrounding region, including construction of a Native American cultural facility and museum, establishment of conservation programs to protect the San Fernando Valley spineflower, and establishment of an endowment to conserve endangered, threatened, and sensitive species that occur within the Santa Clara River watershed. The Company further agreed to (a) refrain from developing certain areas within Newhall Ranch and portions of the Company's Ventura County landholdings and (b) provide construction monitoring programs and archaeological surveys designed to identify and preserve Native American cultural sites within Newhall Ranch. As of September 30, 2017, the Company has recorded a liability of $53.6 million associated with certain obligations of the 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 September 30, 2017, the remaining estimated maximum potential amount of monetary payments subject to the guaranty was $61.6 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 approvals for Newhall Ranch (the "Non-Settling Petitioners").
Water Purchase Agreement
The Company is subject to a water purchase agreement requiring annual payments in exchange for the delivery of water for the Company’s exclusive use. The agreement has an initial 35-year term, which expires in 2039 with an option for a second 35-year term. During the nine months ended September 30, 2017, the Company made a payment of $1.2 million and does not expect to make any additional payments for the remainder of 2017. The annual minimum payments for years 2018 to 2021 are $1.2 million, $1.2 million, $1.3 million, and $1.3 million, respectively. At September 30, 2017, the aggregate annual minimum payments remaining under the initial term total $37.5 million.
Newhall Ranch Infrastructure Project
In January 2012, the Company entered into an agreement with Los Angeles County, in which the Company will finance up to a maximum of $45.8 million for the construction costs of an interchange project that Los Angeles County is administering. The interchange project is a critical infrastructure project that will benefit Newhall Ranch. As of September 30, 2017, the Company has made aggregate payments of $37.0 million, including a payment of $15.0 million made during the nine months ended September 30, 2017. The interchange project is expected to be completed in 2017. There is also a provision for the Company to pay Los Angeles County interest on defined unreimbursed construction costs incurred prior to the reimbursement payment. Upon the final payment, Los Angeles County will credit the Company, in the form of bridge and thoroughfare construction fee district fee credits, an amount equal to the Company’s actual payments, exclusive of any interest payments. These credits are eligible for application against future bridge and thoroughfare fees the Company may incur. At September 30, 2017 and December 31, 2016, the Company had $5.1 million and $16.4 million, respectively, included in accounts payable and other liabilities in the accompanying condensed consolidated balance sheets, representing unreimbursed construction costs payable to Los Angeles County.
Agreement Regarding Mall Venture
On May 2, 2016, the Company entered into an agreement with CPHP pursuant to which, upon completion of the Retail Project, CPHP will contribute all of its interests in the Mall Venture Member to the Operating Company in exchange for 2,917,827 Class A Common Units of the Operating Company. Additionally, CPHP will purchase an equal amount of Class B common shares from the Holding Company at a price of $0.00633 per share. The Retail Project is currently expected to be completed in 2021.
Candlestick Point Development Agreement
On May 2, 2016, the Company entered into a development agreement with CPHP whereby among other things, CPHP agreed to be responsible for all design and construction costs associated with the parking structure to be built on the CP Parking Parcel, up to $240 million, and the Company agreed to reimburse CPHP for design and
construction costs in excess of $240 million. Additionally, the Company agreed to remit to CPHP up to $25 million it realizes from CFD proceeds at Candlestick Point following completion of the parking structure; however, such obligation is subject to a dollar-for-dollar reduction by any amounts the Company pays for costs in excess of $240 million on the parking structure.
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 $75.8 million and $62.8 million as of September 30, 2017 and December 31, 2016, respectively.
San Francisco Shipyard and Candlestick Point Disposition and Development Agreement
The San Francisco Venture is a party to a disposition and development agreement with the San Francisco Agency in which the San Francisco Agency will convey portions of The San Francisco Shipyard and Candlestick Point owned or acquired by the San Francisco Agency to the San Francisco Venture for development. The San Francisco Venture will 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 The San Francisco Shipyard and Candlestick Point if certain thresholds are met. As of September 30, 2017 the thresholds have not been met.
In April 2014, the San Francisco Venture provided the San Francisco Agency with a guaranty of infrastructure obligations with a maximum obligation of $21.4 million and in March 2016 an additional guaranty of infrastructure obligations was made with a maximum obligation of $8.1 million. In June 2017, the Holding 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 and in September 2017, provided an additional guaranty of infrastructure obligations with a maximum obligation of $79.1 million.
Letters of Credit
At September 30, 2017 and December 31, 2016, the Company had outstanding letters of credit totaling $2.2 million and $13.8 million, respectively. These letters of credit were issued to secure various development and financial obligations. At each of September 30, 2017 and December 31, 2016, the Company had restricted cash and certificates of deposit of $2.2 million pledged as collateral under certain of the letters of credit agreements.
Legal Proceedings
California Department of Fish and Wildlife Permits
In December 2010, the California Department of Fish and Wildlife ("CDFW") issued a Master Streambed Alteration Agreement ("MSAA") and two Incidental Take Permits ("ITPs") for endangered species and certified the final Environmental Impact Report ("EIR") portion of the Newhall Ranch Environmental Impact Statement/EIR ("EIS/EIR"). The EIS/EIR was a document jointly prepared by CDFW and the U.S. Army Corps of Engineers (the "Corps"). The Corps prepared and approved the Environmental Impact Statement ("EIS") portion of the joint document under the National Environmental Policy Act ("NEPA"). CDFW prepared and certified the EIR portion of the EIS/EIR under the California Environmental Quality Act ("CEQA"). In January 2011, five petitioners filed a complaint in Los Angeles County Superior Court ("Superior Court") challenging the issuance of the MSAA and ITPs and the certification of CDFW’s final EIR under CEQA, the California Endangered Species Act, and the Fish and Game Code. After a trial court ruling and an appeal, the Second District Court of Appeal ("Court of Appeal") ultimately upheld CDFW’s certification of the EIR and issuance of the MSAA and ITPs. Thereafter, the California Supreme Court ("Supreme Court") granted review on three issues and after issuing an opinion, remanded the case to the Court of Appeal.
In its decision filed in November 2015, the Supreme Court reversed the judgment of the Court of Appeal on the three issues. Procedurally, the Supreme Court’s decision became final in February 2016, after that court denied the petitioners’ and the Company’s respective petitions for rehearing. The three issues addressed by the Supreme Court were: (i) the EIR’s greenhouse gas ("GHG") emissions significance findings, (ii) the EIR’s mitigation measures for a protected fish species ("Stickleback"), and (iii) the timeliness of comments on impacts to cultural resources and steelhead smolt (another fish species). With respect to the GHG issue, the Supreme Court approved the EIR’s methodology analyzing the significance of the project’s GHG emissions in terms of reductions from projected "business as usual" emissions consistent with the statewide reduction mandate in California’s Global Warming Solution Act of 2006 (also known as AB 32) and the baseline methodology used in the EIR’s GHG analysis. However, the Supreme Court held that the GHG analysis lacked substantial evidence and explanation of the project’s no significant GHG findings. For that reason, the Supreme Court directed that the GHG emissions findings be corrected. On the second issue, the Supreme Court held the EIR mitigation measures for Stickleback violated the Fish and Game Code section 5515 prohibition on the "take" of fully-protected fish. On the third issue, the Supreme Court held that certain comments on cultural resources and steelhead smolt were timely submitted and remanded these issues to the Court of Appeal to reexamine the merits of the cultural resources and steelhead issues and issue a new decision on whether substantial evidence supported CDFW’s determinations on these issues.
As to the third issue, in July 2016, after the remand, the Court of Appeal reexamined the merits of the petitioners’ cultural resources and steelhead issues and ruled in favor of CDFW and the Company by finding substantial evidence to support CDFW’s decisions as to these issues. Further, the Court of Appeal denied a petition for rehearing, and after a petition for review was filed, the Supreme Court denied review. In November 2016, the Court of Appeal issued a remittitur, which means the case is complete and the trial court now has jurisdiction to issue post-decision orders, consistent with the Supreme Court’s and the Court of Appeal’s decisions.
In December 2016, after briefing and a hearing, the trial court signed the judgment proposed by CDFW, and the trial court issued the writ of mandate as to the GHG and stickleback issues. In February 2017, petitioners filed a notice of appeal challenging the scope of the trial court’s judgment. Oral argument on the appeal took place in September 2017, and the Company is awaiting a decision from the Court of Appeal.
As to the first two issues above, the Supreme Court's decision required CDFW to reevaluate its project approvals (as they relate to these specific issues) in accordance with the Supreme Court’s holding and to complete an additional environmental analysis, public review, and certification under CEQA. In November 2016, CDFW released for public review the draft additional environmental analysis and the corresponding development plan in response to the two remaining issues, and the public review period concluded in February 2017. In June 2017, CDFW certified the final additional environmental analysis, in combination with the 2010 EIR, and reapproved the Newhall Ranch project and left intact the related state permits (the MSAA and the two ITPs). At that time, CDFW also filed a Notice of Determination (“NOD”), which triggered the 30-day statute of limitations under CEQA in which to file a new or supplemental action against CDFW.
By mid-July 2017, no party had filed a new or supplemental action challenging CDFW’s certification of the final additional environmental analysis and its reapproval of the Newhall Ranch project and related permits. Therefore, the statute of limitations for challenges under CEQA to CDFW’s June 2017 actions has expired.
In September 2017, CDFW filed a return as required by the trial court’s previously issued writ of mandate. In the return, CDFW advised the trial court it had taken the actions required to fully comply with CEQA, the Fish and Game Code, and the trial court’s previously issued writ. In October 2017, the Non-Settling Petitioners objected to CDFW’s return to the writ on procedural and other grounds. The Company cannot predict the outcome of this matter until the Court of Appeal's opinion is issued and the objections are resolved.
Landmark Village
The Los Angeles County Board of Supervisors (the "BOS") certified the final EIR and adopted project approvals for Newhall Ranch’s Landmark Village development area in October 2011 and approved the vesting tentative map, general, specific and local plan amendments and various project permits and other authorizations in February 2012. In March 2012, five petitioners filed a petition in the Superior Court challenging the approvals and certification of the EIR on the alleged grounds that Los Angeles County violated CEQA, the Subdivision Map Act and state
planning and zoning laws. In January 2014, the Superior Court issued a favorable Statement of Decision, which denied petitioners’ request and upheld the BOS approvals, and in April 2015, the Court of Appeal reaffirmed the Superior Court’s decision in full. In August 2015, the Supreme Court granted the petitioners’ request to review the GHG issue but ordered that the action be deferred pending disposition of the related GHG issue in the California Department of Fish and Wildlife action noted above.
In March 2016, the Supreme Court transferred the case to the Court of Appeal, and in November 2016, the Court of Appeal issued a new decision reversing the trial court judgment to the sole extent that the EIR did not support its no significant GHG impact finding with substantial evidence. The Court of Appeal also held that the petitioners’ amended petition and complaint is to be denied in all other respects. In January 2017, the Court of Appeal issued its remittitur which means the case is complete and the trial court now has jurisdiction to issue post-decision orders, consistent with the Supreme Court’s GHG holding and the Court of Appeal’s decision. In March 2017, after briefing and hearing, the trial court signed the judgment proposed by Los Angeles County and the trial court issued the writ of mandate as to the GHG issue. In May 2017, the petitioners filed a notice of appeal and the matter is now pending in the Second District Court of Appeal (Los Angeles). The briefing is expected to be completed in December 2017. Oral argument will then be set pursuant to the Court of Appeal’s order (following the briefing).
Los Angeles County released for public review the draft additional environmental analysis for the Landmark Village EIR in response to the Supreme Court’s GHG holding, and the public review period concluded in February 2017. In July 2017, the BOS held a public meeting and certified the final additional environmental analysis in combination with the 2011 EIR and reapproved the Landmark Village project and related project approvals and permits. At that time, Los Angeles County also filed an NOD, which triggered the 30-day statute of limitations under CEQA in which to file a new or supplemental action against Los Angeles County.
As explained in further detail below, in August 2017, the two Non-Settling Petitioners filed a new action challenging Los Angeles County’s certification of the final additional environmental analysis and its reapproval of the Landmark Village and Mission Village projects and related permits. No other parties filed new or supplemental actions challenging Los Angeles County’s July 2017 actions before the statute of limitations for challenges under CEQA to such actions expired.
In September 2017, Los Angeles County filed a return as required by the trial court’s previously issued writ of mandate. In the return, Los Angeles County advised the trial court it had taken the actions required to fully comply with CEQA, the Fish and Game Code, and the trial court’s previously issued writ. In October 2017, the two Non-Settling Petitioners objected to Los Angeles County’s return to the writ on procedural and other grounds. The Company cannot predict the outcome of this matter until the Court of Appeal's opinion is issued and the objections are resolved.
Consistent with the terms of the Newhall Settlement, the Settling Petitioners filed a request for dismissal of the appeal, and on October 16, 2017, the Court of Appeal granted the request as to the Settling Petitioners only. The appeal is still pending as to the Non-Settling Petitioners, and Los Angeles County and the Company will be briefing the appeal, engaging in oral argument, and awaiting receipt of the Court of Appeal opinion.
Mission Village
In October 2011, the BOS certified the final EIR and provisionally approved Newhall Ranch’s Mission Village development area subject to review of the project’s approval documents, findings, overriding considerations, and mitigation monitoring. In May 2012, the BOS adopted the project approval documents, including the vesting tentative map, permits and other authorizations. In June 2012, five petitioners filed a petition in the Superior Court challenging the approvals and certification of the EIR on the alleged grounds that Los Angeles County violated CEQA, the Subdivision Map Act and state planning and zoning laws. In June 2014, the Superior Court issued a favorable Statement of Decision, which denied the petitioner's request and upheld the BOS approvals, and in September 2015, the Court of Appeal affirmed the Superior Court’s decision in full. In December 2015, the Supreme Court granted the petitioners’ request to review the GHG issue but ordered that the action be deferred pending disposition of the related GHG issue in the California Department of Fish and Wildlife action noted above.
In March 2016, the Supreme Court transferred the case to the Court of Appeal, and on December 1, 2016, the Court of Appeal issued a new decision reversing the trial court judgment to the sole extent that the EIR did not support its
no significant impact greenhouse gas finding with substantial evidence and a reasoned discussion. The Court of Appeal affirmed the trial court judgment in all other respects. In February 2017, the Court of Appeal issued its remittitur which means the case is complete and the trial court now has jurisdiction to issue post-decision orders, consistent with the Supreme Court’s GHG holding and the Court of Appeal’s decision. In March 2017, after briefing and a hearing, the trial court signed the judgment proposed by Los Angeles County and the trial court issued the writ of mandate as to the GHG issue. In May 2017, the petitioners filed a notice of appeal and the matter is now pending in the Second District Court of Appeal (Los Angeles). The briefing is expected to be completed in December 2017. Oral argument will then be set pursuant to the Court of Appeal’s order (following the briefing).
Los Angeles County released for public review the draft additional environmental analysis for the Mission Village EIR in response to the Supreme Court’s GHG holding, and the public review period concluded in February 2017. In July 2017, the BOS held a public meeting and certified the final additional environmental analysis in combination with the 2011 EIR and reapproved the Mission Village project and related project approvals and permits. At that time, Los Angeles County also filed an NOD, which triggered the 30-day statute of limitations under CEQA in which to file a new or supplemental action against Los Angeles County.
As explained in further detail below, in August 2017, the two Non-Settling Petitioners filed a new action challenging Los Angeles County’s certification of the final additional environmental analysis and its reapproval of the Landmark Village and Mission Village projects and related permits. No other parties filed new or supplemental actions challenging Los Angeles County’s July 2017 actions before the statute of limitations for challenges under CEQA to such actions expired.
In September 2017, Los Angeles County filed a return as required by the trial court’s previously issued writ of mandate. In the return, Los Angeles County advised the trial court it had taken the actions required to fully comply with CEQA, the Fish and Game Code, and the trial court’s previously issued writ. In October 2017, the two Non-Settling Petitioners objected to the Los Angeles County’s return to the writ on procedural and other grounds. The Company cannot predict the outcome of this matter until the Court of Appeal's opinion is issued and the objections are resolved.
Landmark Village/Mission Village
In August 2017, the two Non-Settling Petitioners filed a petition for writ of mandate in Los Angeles County Superior Court. The petition challenges Los Angeles County’s July 2017 certification of the Mission Village and Landmark Village final additional environmental analyses and reapproval of the two projects based on claims arising under CEQA and the California Water Code. Los Angeles County is compiling the administrative record, but no hearing will take place until after the record is certified by Los Angeles County and the parties complete the required briefing. Until a trial court decision has been rendered, the Company cannot predict the outcome of this matter.
Other Permits
In August 2011, the Corps approved the EIS portion of the joint EIS/EIR and issued its provisional Section 404 Clean Water Act authorization (the "Section 404 Permit") for Newhall Ranch. In September 2012, the Los Angeles Regional Water Quality Control Board (the "Regional Board") unanimously adopted final Section 401 conditions and certified the Section 404 Permit. In October 2012, opponents filed a petition for review and reconsideration of the Regional Board’s actions to the State Water Resources Control Board (the "State Board"). The Regional Board's actions remain valid while the petition is under review by the State Board. On October 19, 2012, after consulting with the U.S. Environmental Protection Agency (the "USEPA"), the Corps issued the final Section 404 Permit.
In March 2014, five plaintiffs filed a complaint against the Corps and the USEPA in the U.S. District Court, Central District of California (Los Angeles) (the "U.S. District Court"). The complaint alleges that these federal agencies violated various statutes, including the Clean Water Act, NEPA, the Endangered Species Act ("ESA") and the National Historic Preservation Act ("NHPA") in connection with the Section 404 Permit and requests, among other things, that the U.S. District Court vacate the Corps’ approvals related to the Section 404 Permit and prohibit construction activities resulting in the discharge of dredged or fill material into federal waters until the Corps issues a new permit. The Company was granted intervenor status by the U.S. District Court in light of its interests as the landowner and holder of the Section 404 Permit. In September 2014, the U.S. District Court issued an order granting
motions to dismiss the USEPA from this action. The dispositive cross-motions for summary judgment were then filed. The U.S. District Court reviewed and resolved all claims in the case by summary judgment. In June 2015, the U.S. District Court issued a favorable order granting the Corps’ and the Company's motions for summary judgment and denying plaintiffs' summary judgment motion. In September 2015, plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the Ninth Circuit (the "Ninth Circuit"). The Ninth Circuit briefing is completed and oral argument occurred in February 2017.
Consistent with the terms of the settlement, the Settling Petitioners moved to dismiss their claims on appeal and withdraw from the litigation. In October 2017, the Ninth Circuit granted the motion to dismiss the appeal and the claims with prejudice as to the Settling Petitioners (including the NHPA consultation claim). The Ninth Circuit then ordered supplemental briefs to explain the impact of the dismissal, if any, on the remaining Clean Water Act, NEPA, and ESA claims in this appeal. The Corps and the Company, on the one hand, and the Non-Settling Petitioners, on the other hand, filed supplemental briefs pursuant to the Court’s order. The Ninth Circuit has not yet issued its decision.
Until a decision has been made by the Ninth Circuit, the Company cannot predict the outcome of this matter. The monetary impact of an adverse Ninth Circuit ruling, if any, cannot be estimated at this time. Although this federal court proceeding does not include any monetary damage claims, it could result in the need to reassess certain elements of the project’s potential impacts and to modify certain aspects (such as specific mitigation measures or project design features) related to the development plan for Newhall Ranch. An adverse ruling could adversely affect the length of time or the cost required to obtain the necessary governmental approvals to develop Newhall Ranch or a development area within Newhall Ranch, as well as result in additional defense costs or settlement costs, which may not be covered by insurance. An adverse ruling might also require the Company to pay attorneys’ fees and court costs and modify the development plan for Newhall Ranch, which could reduce the number of homesites or amount of commercial square feet the Company desires to develop, increase the Company’s financial commitments to local or state agencies or organizations or otherwise reduce the profitability of the project.
Valencia Water Company
In December 2012, the Company sold all of the shares of Valencia Water Company through an eminent domain settlement agreement to Castaic Lake Water Agency ("CLWA"). Valencia Water Company was a privately-owned water retailer serving portions of the Santa Clarita Valley that was regulated by the California Public Utilities Commission.
In February 2013, a local environmental group called the Santa Clarita Organization for Planning and the Environment ("SCOPE") filed a lawsuit in the Superior Court seeking to invalidate the eminent domain settlement agreement based on a range of claims, including that (1) CLWA is unlawfully providing retail water service in violation of CLWA’s enabling act and (2) CLWA unlawfully acquired and owns Valencia Water Company’s stock in violation of Article XVI, section 17 of the state Constitution. The Superior Court rejected those claims and entered judgment upholding the eminent domain settlement in April 2015, which was upheld on appeal by the Court of Appeal in an opinion issued in July 2016. SCOPE subsequently filed a petition for review by the California Supreme Court, which the Supreme Court denied in November 2016. As a result of such denial, the Superior Court’s April 2015 judgment upholding the eminent domain settlement agreement is now final.
In April 2014, the Newhall County Water District ("NCWD"), a local water retailer in the Santa Clarita Valley, filed a lawsuit in the Superior Court against CLWA alleging the same claims as those brought by SCOPE in the action described above that is now final, namely that (1) CLWA is unlawfully providing retail water service in violation of CLWA’s enabling act; and (2) CLWA unlawfully acquired and owns Valencia Water Company’s stock in violation of Article XVI, section 17 of the state Constitution. NCWD’s writ petition/complaint sought a writ of mandate: (1) directing CLWA to stop providing retail water service through Valencia Water Company; and (2) directing CLWA to divest itself of Valencia Water Company’s stock. The petition/complaint also sought declaratory relief regarding unlawful retail water service and unlawful acquisition and holding of Valencia Water Company’s stock. The Company was not named as a party to the lawsuit but intervened to assist CLWA in defending these challenges to the eminent domain settlement agreement. In December 2016, NCWD and CLWA entered into a settlement agreement, wherein NCWD agreed to dismiss this lawsuit without prejudice and in that same month the request for
dismissal was entered by the Superior Court thereby dismissing this lawsuit without prejudice. On October 5, 2017, NCWD filed a request for dismissal with prejudice, which the court entered on October 17, 2017.
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.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the nine months ended September 30, 2017 and 2016 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
Cash paid for interest
|
$
|
3,158
|
|
|
$
|
1,755
|
|
|
|
|
|
NONCASH INVESTNG AND FINANCING ACTIVITIES:
|
|
|
|
Contingent consideration related to acquisition of the San Francisco Venture (see Note 3)
|
$
|
—
|
|
|
$
|
64,870
|
|
Capital issued in acquisition of interest in the Management Company (see Note 3)
|
$
|
—
|
|
|
$
|
173,488
|
|
Capital issued in acquisition of interest in the San Francisco Venture (see Note 3)
|
$
|
—
|
|
|
$
|
8,939
|
|
Capital issued in acquisition of interest in the Great Park Venture
|
$
|
—
|
|
|
$
|
419,088
|
|
Capital issued in purchase of rights to 12.5% of Non-Legacy Incentive Compensation from FPC-HF Venture I (see Note 3)
|
$
|
—
|
|
|
$
|
14,110
|
|
Recognition of TRA liability
|
$
|
56,216
|
|
|
$
|
201,845
|
|
15. SEGMENT REPORTING
As of and for the three and nine months ended September 30, 2017, the Company’s reportable segments consist of:
• Newhall—includes the community of Newhall Ranch planned for development in northern Los Angeles County, California. The Newhall 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 San Francisco Shipyard and Candlestick Point community 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 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 September 30, 2017, the Company had a 37.5% Percentage Interest in the Great Park Venture and accounts 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 in the Formation Transactions. The Great Park 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 by the Company to the Great Park Venture.
• Commercial Leasing—includes Five Point Gateway Campus, an office and research and development campus within the Great Park Neighborhoods, consisting of approximately one million rentable square feet in four newly constructed buildings. Two of the four buildings (approximately 660,000 aggregate square feet) 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 approximately 135,000 aggregate square feet. Upon completion of tenant improvements, both leases will commence. This segment also includes property management service provided by the Management Company to the Gateway Commercial Venture, the entity that owns the Five Point Gateway Campus. As of September 30, 2017, the Company had a 75% interest in the Gateway Commercial Venture and accounts for the investment under the equity method. The reported segment information for the Commercial Leasing 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):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
Profit (Loss)
|
|
Revenues
|
|
Profit (Loss)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Newhall
|
$
|
5,265
|
|
|
$
|
5,385
|
|
|
$
|
(6,069
|
)
|
|
$
|
(1,906
|
)
|
|
$
|
15,804
|
|
|
$
|
13,659
|
|
|
$
|
(19,204
|
)
|
|
$
|
(18,710
|
)
|
San Francisco
|
2,355
|
|
|
1,665
|
|
|
(5,538
|
)
|
|
(4,862
|
)
|
|
89,299
|
|
|
2,418
|
|
|
(12,565
|
)
|
|
(8,918
|
)
|
Great Park
|
462,165
|
|
|
19,972
|
|
|
126,195
|
|
|
4,250
|
|
|
477,411
|
|
|
25,059
|
|
|
118,103
|
|
|
(64,318
|
)
|
Commercial Leasing
|
3,343
|
|
|
—
|
|
|
(114
|
)
|
|
—
|
|
|
3,343
|
|
|
—
|
|
|
(114
|
)
|
|
—
|
|
Total reportable segments
|
473,128
|
|
|
27,022
|
|
|
114,474
|
|
|
(2,518
|
)
|
|
585,857
|
|
|
41,136
|
|
|
86,220
|
|
|
(91,946
|
)
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Removal of results of unconsolidated entities—
|
Great Park Venture (1)
|
(458,236
|
)
|
|
(15,900
|
)
|
|
(124,621
|
)
|
|
(2,724
|
)
|
|
(465,416
|
)
|
|
(18,297
|
)
|
|
(113,485
|
)
|
|
67,132
|
|
Gateway Commercial Venture (1)
|
(3,273
|
)
|
|
—
|
|
|
184
|
|
|
—
|
|
|
(3,273
|
)
|
|
—
|
|
|
184
|
|
|
—
|
|
Add equity in earnings (losses) from unconsolidated entities—
|
Great Park Venture
|
—
|
|
|
—
|
|
|
22,963
|
|
|
(297
|
)
|
|
—
|
|
|
—
|
|
|
17,722
|
|
|
(479
|
)
|
Gateway Commercial Venture
|
—
|
|
|
—
|
|
|
(138
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(138
|
)
|
|
—
|
|
Corporate and unallocated (3)
|
—
|
|
|
—
|
|
|
(23,173
|
)
|
|
(13,542
|
)
|
|
—
|
|
|
—
|
|
|
(48,227
|
)
|
|
(55,291
|
)
|
Total consolidated balances
|
$
|
11,619
|
|
|
$
|
11,122
|
|
|
$
|
(10,311
|
)
|
|
$
|
(19,081
|
)
|
|
$
|
117,168
|
|
|
$
|
22,839
|
|
|
$
|
(57,724
|
)
|
|
$
|
(80,584
|
)
|
Segment assets and reconciliations to the Company's consolidated balances are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Newhall
|
$
|
444,567
|
|
|
$
|
416,445
|
|
San Francisco
|
1,121,598
|
|
|
1,134,196
|
|
Great Park
|
1,726,405
|
|
|
1,669,679
|
|
Commercial Leasing
|
447,948
|
|
|
—
|
|
Total reportable segments
|
3,740,518
|
|
|
3,220,320
|
|
Reconciling items:
|
|
|
|
Removal of unconsolidated balance of Great Park Venture (1)
|
(1,596,803
|
)
|
|
(1,496,102
|
)
|
Removal of unconsolidated balances of Gateway Commercial Venture (1)
|
(447,948
|
)
|
|
—
|
|
Other eliminations (2)
|
(117,686
|
)
|
|
(69,462
|
)
|
Add investment balance in Great Park Venture
|
435,454
|
|
|
417,732
|
|
Add investment balance in Gateway Commercial Venture
|
106,362
|
|
|
—
|
|
Corporate and unallocated (3)
|
376,634
|
|
|
42,094
|
|
Total consolidated balances
|
$
|
2,496,531
|
|
|
$
|
2,114,582
|
|
(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 Leasing 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 and income taxes. Corporate and unallocated assets consist of cash, marketable securities, receivables, and deferred equity offering and financing costs.
16. SHARE-BASED COMPENSATION
On May 2, 2016, the Board of the Company authorized and approved the Company’s Incentive Award Plan. In doing so, the Board authorized the issuance of up to 8,500,822 Class A common shares of the Holding Company under 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. As of September 30, 2017, there were 5,697,244 remaining Class A common shares available for future issuance under the Incentive Award Plan.
Restricted Share Units
As part of the authorization and approval of the Incentive Award Plan on May 2, 2016, the Board of the Company also authorized and approved the issuance, grant, and delivery of up to 2,350,406 Restricted Share Units ("RSUs"), all of which have been granted as of September 30, 2017. A portion of the RSUs were granted to management and had no requisite service period and were fully vested at the grant date. The remaining portion of the RSUs were granted to management and non-employee consultants and are subject to three or four year vesting terms. All of the RSUs settle on a one-for-one basis in Class A common shares in four equal annual installments with the first settlement having occurred on January 15, 2017. The RSUs may not be sold or transferred prior to settlement. In general, RSUs which have not vested are forfeited upon termination of employment or consulting arrangements. No RSUs were forfeited during the three and nine months ended September 30, 2017. The Company measured the value of RSUs at fair value by applying a discount against the estimated fair value of the Company’s underlying outstanding Common shares attributed to a lack of marketability of the RSUs due to the deferred settlement dates. The Company utilized the Protective Put, Finnerty Put and the Asian Put models as well as certain market inputs to
calculate the discount for post-vesting restrictions. The discount applied to the RSUs ranged from 12% to 19%. The Company amortizes the fair value of outstanding RSUs as share-based compensation expense over the requisite service period, if any, on a straight-line basis.
In January 2017, in connection with the first settlement of RSUs, the Company reacquired 282,555 vested RSUs for $6.5 million for the purpose of settling tax withholding obligations of employees.
Restricted Shares
In January 2017, the Company granted 396,028 restricted shares to executive officers of the Company, entitling the holders to non-forfeitable dividends. The restricted shares vest in three equal annual installments beginning in January 2018. In general, the restricted shares which have not vested are forfeited upon termination of employment. No restricted shares were forfeited during the three and nine months ended September 30, 2017. The Company measured the fair value of the restricted shares 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 would make at the measurement date. The Company amortizes the grant date fair value over the requisite service period on a straight-line basis.
Share Payments
In September 2017, the Company granted 57,144 Class A common shares to certain directors as compensation for service on the Board. The shares were fully vested on the grant date. The fair value of the compensation was determined based on the closing market price of the Company's Class A common shares on the grant date.
The following table summarizes share-based equity compensation activity for the nine months ended September 30, 2017:
|
|
|
|
|
|
|
|
|
Share Based Awards
(in thousands)
|
|
Weighted-
Average Grant
Date Fair Value
|
Nonvested at January 1, 2017
|
1,305
|
|
|
$
|
20.00
|
|
Granted
|
453
|
|
|
$
|
15.52
|
|
Vested
|
(673
|
)
|
|
$
|
19.26
|
|
Nonvested at September 30, 2017
|
1,085
|
|
|
$
|
18.57
|
|
Share-based compensation expense was $5.1 million and $13.9 million for the three and nine months ended September 30, 2017, respectively, and $2.9 million and $23.4 million for the three and nine months ended September 30, 2016, respectively. Share-based compensation expense is included in selling, general, and administrative expenses in the accompanying condensed consolidated statements of operations. Approximately $11.8 million of total unrecognized compensation cost related to non-vested awards is expected to be recognized over a weighted–average period of 1.4 years from September 30, 2017. The estimated fair value at vesting of share-based awards that vested during the nine months ended September 30, 2017 and 2016 was $10.5 million and $20.5 million, respectively.
17. 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. For the nine months ended
September 30, 2017, the Company contributed $0.4 million to the Retirement Plan. The Company anticipates contributing approximately $0.5 million in total to the Retirement Plan during the year ending December 31, 2017.
The components of net periodic benefit for the three and nine months ended September 30, 2017 and 2016, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net periodic benefit:
|
|
|
|
|
|
|
|
Interest cost
|
$
|
206
|
|
|
$
|
215
|
|
|
$
|
618
|
|
|
$
|
647
|
|
Expected return on plan assets
|
(257
|
)
|
|
(252
|
)
|
|
(771
|
)
|
|
(751
|
)
|
Amortization of net actuarial loss
|
28
|
|
|
23
|
|
|
84
|
|
|
71
|
|
Net periodic benefit
|
$
|
(23
|
)
|
|
$
|
(14
|
)
|
|
$
|
(69
|
)
|
|
$
|
(33
|
)
|
18. INCOME TAXES
The Company accounts for income taxes in accordance with ASC 740, 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 each of the three months ended September 30, 2017 and 2016, the Company recorded no benefit for income taxes (after application of increases in the Company's valuation allowance of $1.8 million and $2.4 million, respectively) on pre-tax loss of $10.3 million and $19.1 million, respectively. For the nine months ended September 30, 2017 and 2016, the Company recorded no benefit for income taxes (after application of an $9.3 million increase in the Company's valuation allowance) and a benefit of $4.5 million, respectively, on pre-tax loss of $57.7 million and $85.0 million, respectively. The effective tax rates for the three and nine months ended September 30, 2017 and 2016, differ from the 35% federal statutory and applicable state statutory tax 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.
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 ASC 740. 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 2013 through 2016 generally remain subject to examination by federal and state tax authorities. The Company is not currently under examination by any tax authority. The Company classifies any interest and penalties related to income taxes assessed by jurisdiction as part of income tax expense. The Company has
concluded that there were no significant uncertain tax positions requiring recognition in its financial statements, nor has the Company been assessed interest or penalties by any major tax jurisdictions related to any open tax periods.
19. EARNINGS PER SHARE
The Company uses the two-class method in its computation of earnings per share. Pursuant to the terms of the Five Point Holdings, LLC 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 of common shares share in the Company’s losses, and they share in the losses using the same mechanism as the distributions. For the three and nine months ended September 30, 2017 and 2016, the Company is operating in a net loss position, and as such, net losses attributable to the parent were allocated to the Class A common shares and Class B common shares at an amount per Class B common share equal to 0.03% multiplied by the amount per Class A common share. Basic loss per Class A common share is determined by dividing net loss allocated to Class A Common shareholders by the weighted average number of Class A common shares outstanding for the period. Basic loss per Class B common share is determined by dividing net loss allocated to the Class B common shares by the weighted average number of Class B common shares outstanding during the period.
Diluted 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 Class A Common Units of the Operating Company, and the treasury stock method for RSUs and restricted shares, and are included in the calculation if determined to be dilutive.
The following table summarizes the basic and diluted earnings per share/unit calculations for the three and nine months ended September 30, 2017 and 2016 (in thousands, except unit/shares and per unit/share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
Net loss attributable to the Company
|
$
|
(4,467
|
)
|
|
$
|
(6,394
|
)
|
|
$
|
(22,092
|
)
|
|
$
|
(30,179
|
)
|
Adjustments to net loss attributable to the Company
|
(28
|
)
|
|
(118
|
)
|
|
(752
|
)
|
|
(380
|
)
|
Net loss attributable to common shareholders
|
$
|
(4,495
|
)
|
|
$
|
(6,512
|
)
|
|
$
|
(22,844
|
)
|
|
$
|
(30,559
|
)
|
Numerator for basic and diluted net loss available to Class A Common Shareholders/Unitholders
|
$
|
(4,493
|
)
|
|
$
|
(6,508
|
)
|
|
$
|
(22,833
|
)
|
|
$
|
(30,545
|
)
|
Numerator for basic and diluted net loss available to Class B Common Shareholders
|
$
|
(2
|
)
|
|
$
|
(4
|
)
|
|
$
|
(10
|
)
|
|
$
|
(14
|
)
|
Denominator:
|
|
|
|
|
|
|
|
Basic and diluted weighted average Class A common shares outstanding
|
62,946,348
|
|
|
38,471,610
|
|
|
51,024,766
|
|
|
37,581,521
|
|
Basic and diluted weighted average Class B common shares outstanding
|
81,463,433
|
|
|
74,320,575
|
|
|
77,944,525
|
|
|
41,228,932
|
|
Basic and diluted loss per share/unit:
|
|
|
|
|
|
|
|
Class A common shares/Unit
|
$
|
(0.07
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.81
|
)
|
Class B common shares
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
Anti-dilutive potential RSUs
|
688,692
|
|
|
1,304,804
|
|
|
688,692
|
|
|
1,304,804
|
|
Anti-dilutive potential Restricted Shares
(weighted average)
|
396,028
|
|
|
—
|
|
|
375,644
|
|
|
—
|
|
Anti-dilutive potential Class A common shares/Units
(weighted average)
|
81,487,871
|
|
|
74,342,871
|
|
|
77,967,908
|
|
|
46,937,430
|
|
Anti-dilutive potential Class B common shares
(weighted average)
|
2,917,827
|
|
|
2,917,827
|
|
|
2,917,827
|
|
|
1,619,394
|
|
20. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss attributable to the Company consists of unamortized defined benefit pension plan net actuarial losses that totaled $2.8 million and $2.5 million at September 30, 2017 and December 31, 2016, net of tax benefits of $0.3 million at each of September 30, 2017 and December 31, 2016. At September 30, 2017 and December 31, 2016, the Company held a full valuation allowance of $0.3 million related to the accumulated tax benefit of $0.3 million. Accumulated other comprehensive loss of $2.0 million and $2.5 million is included in noncontrolling interests at September 30, 2017 and December 31, 2016. 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 $47,000 and $34,000, net of taxes, respectively, and are included in selling, general, and administrative expenses on the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2017, and 2016, respectively.