Current market dynamics continue to drive down equity prices. Although I've been trying to avoid checking my portfolio lately, I recently came across a real estate opportunity that is cheap enough for me to take an initial position in.

Five Point Holdings ($342M market-cap) is a land builder and a real estate development company. It owns large land areas in highly supply-constrained coastal California cities of Los Angeles, Irvine, and San Francisco through three mixed-use developments: Great Park, Valencia, and Shipyards.

Without even looking at what’s under the lid, the company looks extremely undervalued just from a balance sheet perspective. As of latest filing, it has:

• $430M in cash (vs. $342 in current market-cap)

• $2.8B in total current assets (including receivables, and land NAV)

• $896M in total liabilities (and further debt reduction and de-risking financing planned)

In other words, the current market-cap is 20% of the NAV. Ben Graham would call this a “net-net” play. However, this discount alone doesn’t make it a compelling opportunity. Large land areas with lots of unextracted value are known to trade cheaply (ex. $HHH, $CKX), and the current cash levels could be a red herring without looking at the burn and the debt overhang. However, peeking under the hood paints a much better picture.

Note that the San Francisco project is still mostly under development. In November 2024, FPH also received approvals to transfer ~2M sq. ft. of commercial office space to Candlestick from the Shipyard, and the construction at Candlestick is expected to begin in 2026.

FPH is also involved in a lawsuit delaying the development of the Shipyard property. This site was previously owned by the US Navy, and ~408 acres are still owned by the Navy and the ownership will not be transferred until the Navy completes the “finding of suitability to transfer.” This site was previously contaminated with chemical and radioactive waste, and I won’t try to put a timeline on the redevelopment process here so it’s probably better to mark this to 0 for valuation purposes.

Valuation

From the latest Q

Even without factoring in SF land development at all, FPH seems to be trading at an unusually large discount.

Mispricing Reasons

Historically, FPH has had a complicated capital structure, a debt overhang due to the $525M worth of 10.5% senior notes, and a lot of uncertainty and delays due to the active lawsuit around the Shipyard facility in SF. The overall hostile regulatory environment in California along with the fires in LA did not help improve the sentiment either.

Catalysts

1. A huge cash position of $431M, and significant improvements to existing cost structure.

    

2. The $525M 10.5% notes are callable at 102%, currently costing $38M annually but the management plans to reduce debt by $100-200M this year; $200M seems more likely.

    

3. If $200M is paid down and 8% notes replace them, net interest cost drops to $17M/year, saving $21M/year.

    

4. With $200M net income and an undrawn revolving credit, more than $200M debt reduction is possible, leading to higher savings.

    

5. The high-yield market is favorable, and the CFO's recent activity suggests a comprehensive refinancing might occur soon.

    

6. Rezoning of more commercial real estate to residential in the Irvine region, drawing in more profits.

    

7. Insider buying and other funds holding significant positions at current levels (Director Levinson Sam bought a $10M position last October).

Disclosure: I own shares of FPH