What changed in this filing

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Item 1A. Risk Factors

2024-03-04 compared with 2023-03-06 · 36 added, 59 removed, 344 unchanged (22% of the section changed)

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Risks Related to Our Business and Industry

Our business has been disrupted by the outbreak and worldwide spread of COVID-19 and could be materially and adversely affected by COVID-19 or by a similar epidemic or pandemic, or similar public threat, or fear of such an event, and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it.

and other countries have experienced, and may experience in the future, outbreaks of contagious diseases that affect public health and public perception of health risk.

Federal, state and local governments and private entities in impacted regions have taken, and may continue to take, actions in an effort to slow the spread of COVID-19 and variants of the virus.

In response to these steps, we initially shifted a majority of our office functions to work remotely and implemented a COVID-19 Prevention Program, which sets forth COVID-19-related safety protocols and procedures and worksite-specific operational plans for the locations at which associates have returned to work on site.

Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence and consumer confidence.

There is significant uncertainty regarding the extent to which and how long the impacts of COVID-19 will continue to disrupt the U.S.

Our business could be negatively impacted over the medium-to-longer term if the disruptions related to COVID-19 continue.

Potential impacts could include asset impairments similar to the impairment we recognized in 2020 of $26.9 million attributed to our investment in the Great Park Venture primarily as a result of expected delays in both the timing of land sales to builders and distributions to us causing a decline in the fair value of our investment in the Great Park Venture (see Part II, Item 8 of this report).

If COVID-19 continues to have a significant negative impact on economic conditions over a prolonged period of time, our results of operations and financial condition could be adversely impacted.

COVID-19 also may have the effect of heightening many of the other risks described in the Risk Factors listed below.

There are significant risks associated with our development and construction projects that may prevent completion on budget and on schedule.

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We therefore have greater exposure to the risks of natural disasters, which can lead to power shortages, shortages of labor and materials, increased costs, and delays in development.

The occurrence of natural disasters may also negatively impact the demand for new homes in affected areas.

The occurrence of natural disasters may also negatively impact the availability of homeowners insurance and the demand for new homes in

affected areas.

If our insurance does not fully cover losses resulting from these events, our financial condition and results of operations could be adversely affected.

Additionally, if drought conditions continue in California, state and local authorities could enact restrictions or moratoriums on building permits and access to utilities, such as water and sewer taps, which could delay or prevent our construction activities, as well as the construction of homes and commercial buildings, even when we have obtained water rights for our communities.

Additionally, if drought conditions occur within California, state and local authorities could enact restrictions or moratoriums on building permits and access to utilities, such as water and sewer taps, which could delay or prevent our construction activities, as well as the construction of homes and commercial buildings, even when we have obtained water rights for our communities.

We are highly dependent on homebuilders.

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For example, we have been experiencing increases in the prices of labor and materials across all of our communities, which may adversely affect our financial condition and results of operations.

In addition, the current conditions of high inflation and rising interest rates, which caused significant increases in mortgage rates during 2022, have resulted in decreased demand by homebuyers for new homes and a corresponding softening of demand by our guest builders for home sites.

While inflation moderated somewhat in the latter half of 2023, interest rates and mortgage rates remain elevated relative to recent rate levels, which can decrease demand by homebuyers for new homes and soften demand by our guest builders for home sites.

Our business could be materially and adversely affected by an epidemic or pandemic, or similar public threat, or fear of such an event, and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it.

and other countries have experienced, and may experience in the future, outbreaks of contagious diseases that affect public health and public perception of health risk.

Federal, state and local governments and private entities in impacted regions may take actions in an effort to slow the spread of such contagious diseases, including quarantines, restrictions on travel, stay-at-home orders, social distancing measures, restrictions on types of business that may continue to operate and/or restrictions on types of construction projects that may continue, which could adversely affect our ability to operate our business.

Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence and consumer confidence, and our business could be negatively impacted by disruptions related to any such contagious disease.

In addition, these risks and uncertainties may also have the effect of heightening many of the other risks described in this section.

Significant competition could have an adverse effect on our business.

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We compete with a number of residential, retail and commercial developers, some with greater financial resources, in seeking resources for development and prospective purchasers.

Competition from other real estate developers may adversely affect our ability to attract purchasers and sell or lease residential, retail and commercial properties, attract and retain experienced real estate development personnel or obtain construction materials and labor.

Competition from other real estate

developers may adversely affect our ability to attract purchasers and sell or lease residential, retail and commercial properties, attract and retain experienced real estate development personnel or obtain construction materials and labor.

These competitive conditions could make it difficult to sell properties at desirable prices and could adversely affect our financial condition and results of operations.

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Further, if the terms and conditions of our existing development agreements with the Cities of Irvine and San Francisco are not complied with, existing entitlements under those agreements could be lost, including (in the case of San Francisco) the right to acquire certain portions of the land on which development activity is expected.

New housing and commercial developments are often subject to determinations by the administering governmental authorities as to the adequacy of water and sewage facilities, roads and other local services, and may also be subject to various assessments for schools, parks, streets, affordable

housing and other public improvements.

As a result, the development of properties may be subject to periodic delays in certain areas due to the conditions imposed by the administering governmental authorities.

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Changing market conditions during the entitlement period could negatively impact our revenue from land sales or leasing of retail or other commercial space.

Historically, certain of our entitlements, permits and development approvals have been challenged by third parties, such as environmental groups.

Historically, certain of our entitlements, permits and

development approvals have been challenged by third parties, such as environmental groups.

Future entitlements, permits and development approvals that we will need to obtain for development areas within our communities may be similarly challenged.

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Under these and other environmental requirements, as a property owner or operator, we may be required to investigate and clean up hazardous or toxic substances or chemical releases at our communities or properties currently or formerly owned or operated by us, including as a result of the current and former oil and gas leasing operations at Valencia or as a result of prior activities conducted at the El Toro Base or The San Francisco Shipyard.

Some of our properties have been or may be impacted by contamination arising from these or other prior

uses of these properties or adjacent properties.

Some of our properties have been or may be impacted by contamination arising from these or other prior uses of these properties or adjacent properties.

In this regard, certain portions of the El Toro Base and The San Francisco Shipyard have been or currently are listed on the USEPA’s National Priorities List as sites requiring cleanup under federal environmental law.

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The costs of investigation, remediation or removal of those substances, or fines, penalties and other sanctions and damages from third-party claims for property damage or personal injury, may be substantial, and the presence of those substances, or the failure to remediate a property properly, may impair our ability to sell, lease or otherwise use our property.

While we currently have and may maintain insurance policies from time to time to mitigate some or all of these risks, insurance coverage for such claims may be limited or nonexistent.

While we currently

have and may maintain insurance policies from time to time to mitigate some or all of these risks, insurance coverage for such claims may be limited or nonexistent.

In addition, to the extent that we have indemnification rights against third parties relating to any such environmental liability or remediation costs, the indemnification may not fully cover such costs or we may not be able to collect the full amount of the indemnification from the third-party.

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Such litigation could adversely affect the length of time and the cost required to obtain the necessary governmental approvals.

In addition, adverse decisions or publicity arising from any litigation could increase the cost and length of time to obtain

ultimate approval of a project, could require us to abandon all or portions of a project and could adversely affect the design, scope, plans and profitability of a project, any of which could negatively affect our financial condition and results of operations.

In addition, adverse decisions or publicity arising from any litigation could increase the cost and length of time to obtain ultimate approval of a project, could require us to abandon all or portions of a project and could adversely affect the design, scope, plans and profitability of a project, any of which could negatively affect our financial condition and results of operations.

We may be subject to increased costs of insurance or limitations on coverage.

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Effective succession planning is also important to our long-term success.

In recent years, we experienced numerous changes in our executive management team, including the appointments of Daniel Hedigan as our Chief Executive Officer in February 2022 and Stuart Miller as our Executive Chairman in 2021, the transitions of our former Chief Executive Officer (Emile Haddad) and our former Chief Operating Officer (Lynn Jochim) to senior advisory roles, and the resignation of our former Chief Financial Officer (Erik Higgins).

Failure to ensure effective transfer of knowledge and smooth transitions involving executives and other key employees could hinder our strategic planning, execution and future performance.

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In addition, future financing arrangements may contain negative covenants limiting the ability of the operating company to make distributions to us.

Furthermore, the ability of the operating company’s subsidiaries and the Great Park Venture to

pay distributions to the operating company may be limited by their obligations to their respective creditors and other investors.

Furthermore, the ability of the operating company’s subsidiaries and the Great Park Venture to pay distributions to the operating company may be limited by their obligations to their respective creditors and other investors.

For example, the distribution rights of the holders of legacy interests in the Great Park Venture and the Class B partnership interests in Five Point Communities, LP will reduce the cash available for distribution to the operating company.

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Transactions between Lennar and us must be approved by our conflicts committee.

Transactions between the Great Park Venture and Lennar must be approved by a majority of the members of the Great Park Venture (excluding us).

Our conflicts committee also reviews transactions between the Great Park Venture and Lennar, which are ultimately subject to approval by a majority of the members of the Great Park Venture (excluding us).

Nonetheless, Lennar’s relationship with us could give it an advantage in bidding for properties that we own.

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We expect that during the expected term of the TRA, the payments that we make to the parties to the TRA could be substantial.

exchanges, the extent to which such exchanges are taxable and our ability to use the potential tax benefits, which will depend on the amount and timing of our taxable income and the rate at which we pay income tax.

The actual amount and timing of any payments under the TRA will vary depending upon a number of factors, including the timing of exchanges of Class A units of the operating company, the price of our Class A common shares at the time of such exchanges, the extent to which such exchanges are taxable and our ability to use the potential tax benefits, which will depend on the amount and timing of our taxable income and the rate at which we pay income tax.

Due to the various factors that will affect the amount and timing of the tax benefits we will receive, it is not possible to determine the exact amount of payments that will be made under the TRA.

If the TRA had been terminated on December 31, 2022, we estimate that the termination payment would have been approximately $85.3 million, assuming no material changes to the relevant tax law, that the aggregate value of our properties is equal to the value implied by such per share price and that LIBOR is 5.4%.

If the TRA had been terminated on December 31, 2023, we estimate that the termination payment would have been approximately $106.7 million, assuming no material changes to the relevant tax law, that the aggregate value of our properties is equal to the value implied by such per share price and that SOFR is 4.8%.

However, this is merely an estimate, and the actual payments made under the TRA in the event that it is terminated or otherwise could be significantly greater.

In certain circumstances, payments under the tax receivable agreement could exceed the actual tax benefits we realize.

The TRA provides that, upon a merger, asset sale or other form of business combination or certain other changes of control or if, at any time, we materially breach any of our obligations under the TRA or elect an early termination, our (or our successor’s) obligations with respect to exchanged or acquired units (whether exchanged or acquired before or after such change of control, early termination or breach) will be based on certain assumptions, including that (1) we will have sufficient taxable income to fully utilize the increased tax deductions and other benefits anticipated by the TRA, (2) all of our properties will be disposed of ratably over a 15 year period for fair market value and (3) any Class A units of the operating company that have not been exchanged will be deemed exchanged for the market value of our Class A common shares at the time of such change of control, early termination or breach.

The TRA provides that, upon a merger, asset sale or other form of business combination or certain other changes of control or if, at any time, we materially breach any of our obligations under the TRA or elect an early termination, our (or our successor’s) obligations with respect to exchanged or acquired units (whether exchanged or acquired before or after such change of control, early termination or breach) will be based on certain assumptions, including that (1) we will have sufficient taxable income to fully utilize the increased tax deductions and other benefits anticipated by the TRA, (2) all of our properties will be disposed of ratably over the period ending on the fifteenth anniversary of the date of the TRA for fair market value and (3) any Class A units of the operating company or any class A units of the San Francisco Venture that have not been exchanged will be deemed exchanged for the market value of our Class A common shares at the time of such change of control, early termination or breach.

Consequently, it is possible in these circumstances that the actual cash tax savings realized by us may be significantly less than the corresponding TRA payments.

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Our substantial indebtedness may have a material adverse effect on our business, our financial condition and results of operations and our ability to secure additional financing in the future.

As of December 31, 2022, we had approximately $625.0 million of total indebtedness of our 7.875% senior notes due 2025 (the “senior notes”).

As of December 31, 2023, we had approximately $625.0 million of total indebtedness of our 7.875% senior notes due 2025.

We also had $125.0 million available to be borrowed under our revolving credit facility as of December 31, 2023.

In January 2024, we exchanged $623.5 million of our existing 7.875% senior notes due November 2025 for $100.0 million in cash and $523.5 million in new 10.500% initial rate senior notes due January 2028.

Our indebtedness could subject us to many risks that, if realized, would adversely affect us, including the following:

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We may decide to increase leverage to execute our development plan.

Our board of directors will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of new indebtedness, including

the estimated market value of our assets and the ability of particular assets, and our company as a whole, to generate cash flow to cover the expected debt service.

Although the indenture relating to our senior notes limits our ability to incur additional indebtedness, our operating agreement does not limit the amount of debt we may incur, and our board of directors may change our target debt levels at any time without the approval of our shareholders.

Our board of directors will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of new indebtedness, including the estimated market value of our assets and the ability of particular assets, and our company as a whole, to generate cash flow to cover the expected debt service.

Although the indenture relating to our senior notes due 2028 limits our ability to incur additional indebtedness, our operating agreement does not limit the amount of debt we may incur, and our board of directors may change our target debt levels at any time without the approval of our shareholders.

We may incur additional indebtedness from time to time in the future to finance working capital, capital expenditures, investments or acquisitions, or for other purposes.

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We do not expect to be able to generate sufficient cash flow from operations to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or refinance our debt obligations, including the senior notes, depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control.

Our ability to make scheduled payments on or refinance our debt obligations, including our senior notes, depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control.

We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

Until such time as we can service our indebtedness with cash flow from operations, we intend to service our indebtedness, including interest on the senior notes and the revolving credit facility, from cash on hand.

Until such time as we can service our indebtedness with cash flow from operations, we intend to service our indebtedness, including interest on our senior notes and the revolving credit facility, from cash on hand.

If our cash flows, cash on hand and other capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional indebtedness or equity capital, or restructure or refinance our indebtedness.

We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations.

The credit agreement governing the revolving credit facility and the indenture relating to the senior notes restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise indebtedness or equity capital to be used to repay other indebtedness when it becomes due.

The credit agreement governing the revolving credit facility and the indenture relating to the senior notes due 2028 restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise indebtedness or equity capital to be used to repay other indebtedness when it becomes due.

We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.

Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations.

If we cannot make scheduled payments on our indebtedness, we will be in default and holders of the senior notes could declare all outstanding principal and interest to be due and payable, the lenders under the revolving credit facility could terminate their commitments to loan money, other indebtedness could be accelerated and we could be forced into bankruptcy or liquidation.

Uncertainty about the future of the London Interbank Offer Rate ("LIBOR") may adversely affect our business and financial results.

Borrowings under our revolving credit facility bear interest at LIBOR plus an applicable margin.

In July 2017, the UK’s Financial Conduct Authority, which regulates LIBOR, announced its intent to phase out LIBOR by the end of 2021.

The Alternative Reference Rates Committee in the United States has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to U.S.

dollar LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR.

The first publication of SOFR was released in April 2018.

In November 2020, the Federal Reserve Board along with various independent groups announced the potential for certain U.S.

dollar LIBOR tenors to continue to be published until June 2023.

This change would allow most legacy U.S.

dollar LIBOR contracts to mature before disruptions occur in the U.S.

dollar LIBOR market, without the need to transition those contracts to SOFR.

Whether or not SOFR or another reference rate attains market traction as a LIBOR replacement remains a question, and the future of LIBOR at this time is uncertain.

Even with the Federal Reserve Board’s announcement about the extension, if the method for calculation of LIBOR changes, LIBOR is no longer available or lenders have

increased costs due to changes in LIBOR, we may suffer from potential increases in interest rates on our revolving credit facility.

Further, we may need to renegotiate our revolving credit facility or other agreements that reference LIBOR to replace LIBOR with the new standard that is established.

These uncertainties or their resolution also could negatively impact our borrowing costs and other aspects of our business and financial results.

If we cannot make scheduled payments on our indebtedness, we will be in default and holders of our senior notes could declare all outstanding principal and interest to be due and payable, the lenders under the revolving credit facility could terminate their commitments to loan money, other indebtedness could be accelerated and we could be forced into bankruptcy or liquidation.

Risks Related to Ownership of Our Class A Common Shares

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We are required to use our reasonable efforts to keep the Form S-3 registration statement (or a successor registration statement) effective until there are no longer any registrable securities other than Class A common shares that can be sold under Rule 144 without any limitation as to volume or manner of sale.

In addition, 3,122,504 Class A common shares are available for future issuance under our incentive award plan as of December 31, 2022.

In addition, 7,582,152 Class A common shares were available for future issuance under our incentive award plan as of December 31, 2023.

We cannot predict whether future issuances or sales of our Class A common shares or the availability of shares for resale in the open market will decrease the per share trading price of our Class A common shares.

The per share trading price of our Class A

common shares may decline significantly when the restrictions on resale by certain of our shareholders lapse or upon the registration of additional Class A common shares pursuant to registration rights granted to certain shareholders.

The per share trading price of our Class A common shares may decline significantly when the restrictions on resale by certain of our shareholders lapse or upon the registration of additional Class A common shares pursuant to registration rights granted to certain shareholders.

We do not intend to pay distributions on our Class A common shares for the foreseeable future.

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Our business operations and information technology systems, and the information technology systems we use that are provided or managed by third-party service providers, may be attacked by individuals or organizations intending to disrupt our business operations and information technology systems and those of our third-party service providers, whether through cyber-attacks or cyber-intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization, or persons with access to systems inside our organization.

The risk of a security breach or disruption, particularly through cyber-attacks or cyber-intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.

and sophistication of attempted attacks and intrusions from around the world have increased.

We rely on information technology systems to conduct important operational activities and to maintain our business and employee records and financial data.

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Any attack on such systems that would result in the unauthorized release or loss of employee or other confidential or sensitive data could have a material adverse effect on our business.

There can be no assurance that our cybersecurity risk management program and processes, including our policies, controls or procedures, will be fully implemented, complied with or effective in protecting our systems and information.

If we fail, or are perceived to have failed, to properly respond to security breaches of our or third-party’s information technology systems or fail to properly respond to consumer requests under applicable privacy laws, we could experience reputational damage, an increase in our costs and exposure to additional material legal claims and liability.

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Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our business, financial condition, results of operations and stock price.

Unresolved Staff Comments

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors