California Buildin' - First Point Holdings Set For IPO

Overview

Five Point Holdings LLC (proposed ticker: FPH) filed an S-11/A with the Securities and Exchange Commission for its upcoming initial public offering. The IPO is expected to take place on Wednesday, May 10. The company intends to sell 21 million shares at a marketed price range of $18 to $20. It has an additional 3.15 million shares as an overallotment option for its underwriters. Assuming Five Point Holdings LLC prices at the midpoint of its price range, it would have a market cap value of $2.68B.

Lennar Inc., an existing stockholder, has entered into a securities purchase agreement to purchase $100 million worth of shares at the IPO price. Additionally, Third Avenue Management LLC and Castlelake, L.P. have both indicated an interest in purchasing $25 million worth of shares each. Although these indications of interest are not binding, it shows real excitement about the deal.

The underwriters of the IPO are Citigroup, J.P. Morgan, RBC Capital Markets, Wells Fargo Securities, Deutsche Bank Securities, Evercore ISI, Zelman Partners LLC and JMP Securities. Major shareholders include Lennar Inc. (40.2% post-IPO) and CastleLake L.P. (16.5% post-IPO).

We first previewed the deal on our IPO Insights Platform.

Business overview

Five Point Holdings LLC is the biggest developer and owner of master-planned, mixed-use communities in the coastal area of California. The company has three communities that are located in areas with some of the highest real estate demand in the state, including in San Francisco County, Los Angeles County and Orange County. The communities that the company is developing are designed to hold 40,000 homes and more than 21 million square feet of commercial space. The company was formed in 2009 and is based in Aliso Viejo, Calif.

Source: Company Website

Executive management team

Emile Haddad has served as the chief executive officer, chairman of the board and president of Five Point Holdings since May 2016 and as a member of the board since 2009. He served as the CEO and president of the management company from 2009 until 2016. He previously served as the chief investment officer of Lennar. Haddad and holds an undergraduate degree in civil engineering from the American University of Beirut.

Erik R. Higgins is the vice president and chief financial officer of Five Point Holdings LLC and has served in those roles since May 2016. Higgins served as the CFO of the management company from Sept. 2015 to May 2016. Prior to joining the management company, Higgins worked for more than 10 years as the senior vice president of the national finance division of Lennar. Prior to that, he worked for 12 years at Newhall Land & Farming until its acquisition in 2004. Higgins holds a Bachelor of Arts in economics from the University of California, Santa Barbara and a Master of Business Administration from the University of Southern California.

Financial highlights and risks

Five Point Holdings LLC generates revenue through sale of residential and commercial land sites to homebuilders, commercial developers and commercial buyers as well as through leasing of property.

Revenue is also generated through management services. Currently, the company has management agreements with Lennar Ventures and Great Park Venture. In 2016, the company realized $3.5M and $13.3M in management services from Lennar Ventures and Great Park Ventures, representing nearly all the revenue from management services.

The company generated total revenue from land sales and management services of $39.3M in 2016, compared to $35.58M in 2015. During the same time period, net losses were $63.3M and $1.13M. The fact that net losses were nearly double the revenue generated in the most recent calendar year makes us wary. As of December 2016, the company had cash and cash equivalents of $62.3M, total assets of $2.1M, and total liabilities of $606.4M.

The company competes with other developers of residential and commercial properties in coastal areas of Northern and Southern California. However, its model of building community-based, luxury spaces is unique and may give it a competitive edge. Its three communities are all located near major metropolitan areas.

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Source: 

S-11/A

Conclusion: Consider Caution

Despite excitement surrounding the IPO, and interest in several major institutional investors to buy shares, we are concerned about the heavy spending and reliance on Lennar Inc. and CastleLake L.P. Although there is tough competition in the space, First Point Holdings design model differentiates it from other developers in the region.

We expect the IPO to make a quite a splash initially, but are unsure whether or not it will be successful in the long term. Given this, we recommend investors hold off until further signs of progress at the company.