This is not a stock pitch. It’s just me digging into some corporate fine print. I’m not going to tell you if Five Point Holdings is undervalued (or even what they do). You can figure that out for yourself!1 I’m only sharing some stuff that I think is interesting. Let’s start with a timeline of recent events.
July 24: FPH reports quarterly earnings. The market is disappointed and shares drop 15%. Note the following snippet from the conference call.
September 3: the CEO, CFO and COO receive large stock grants with aggressive hurdle rates. See the fine print below. Shares closed at $5.68 that day. These thresholds implied a 15% - 32% IRR over 5 years, with the stock having to quadruple for the highest threshold. These grants were off-cycle and in many ways atypical. More details about the grants here.
September 15: FPH announces a debt refinancing. They push out maturities to 2030 and will save about $20m in interest annually.
September 26: FPH files its new debt indentures with the SEC. Buried in the fine print are two key changes. First of all, the indentures now take into account cash when calculating the leverage ratio (FPH has a lot of cash on its balance sheet). Second, the old indentures only allowed ‘arbitrary’ cash payments pursuant to clause C (repay subordinated debt) and clause D (make some investments). Those restrictions have been removed. What are clause A and B payments that were forbidden beforehand? You guessed it: dividends and buybacks.
It is my belief that an atypical stock grant often has some signal value. In this case, two-thirds of Q3 had already passed when the board made the grant. It would be a bit of a backstab to grant officers equity with aggressive hurdle rates when you already know that the current quarter is going to be a disaster.
I think it is more likely that exactly the opposite happened. The board was aware about the upcoming debt refinancing and the potential for capital returns and made a ‘spring-load grant’,2 i.e. they made a timely grant of cheap equity when the stock dropped after disappointing Q2 results, just before the good stuff was shared with the public.
An open question for the reader: has all the good stuff been shared with the public? What do you reckon management is incentivized to do when 1) there’s a boatload of cash on the balance sheet and debt maturities are now half a decade away 2) debt indentures have been tuned to allow capital returns and 3) they need the stock price to quadruple to hit the jackpot?
An interesting paper about this phenomenon, which you could argue is a form of insider trading: https://jcl.law.uiowa.edu/sites/jcl.law.uiowa.edu/files/2021-08/SchipaniSeyhunAvciFinal_Web.pdf