Five Point Holdings LLC credit rating upgraded by S&P Global Ratings

Investing.com -- S&P Global Ratings has upgraded the credit rating of Irvine, Calif.-based master-planned community (MPC) developer Five Point Holdings LLC (NYSE:FPH) from ’B-’ to ’B’. The rating upgrade comes on the back of improving credit metrics and a stable outlook for the company.

Five Point Holdings has been experiencing an upward trend in its operating performance, which has positively impacted its leverage profile. This improvement comes amid high demand for finished and available lots. The company’s debt to EBITDA is projected to be around 5x, with an EBITDA interest coverage ratio of above 2x for the next 12 months.

The issue-level rating was also lifted to ’B+’ from ’B’, while the ’2’ recovery rating for Five Point Holdings’ senior unsecured notes due 2028 was affirmed. The ’2’ recovery rating signifies an expected substantial recovery of between 70%-90% (rounded estimate: 85%) in case of a default.

The stable outlook is based on the anticipated continued demand for finished lots in Five Point Holdings’ California markets, despite limited overall supply. The company is expected to use its cash position to fund the development of long-term projects. It is anticipated that credit metrics such as debt to EBITDA and EBITDA interest coverage will remain around 5x and above 2x, respectively, through 2025.

The company’s adjusted leverage improved to 3.5x at the end of 2024, down from 6.8x at the end of 2023. This improvement was primarily driven by an incremental EBITDA of $100 million and increased profitability. The 2025 EBITDA is expected to be between $150-$175 million.

Five Point Holdings has a cash balance of $430.9 million and full availability under the $125 million revolving credit facility due 2027 as of Dec. 31, 2024. This provides the company with a robust liquidity cushion, offsetting the risks of fluctuating land sales and potential elevated leverage in the coming years.

Despite an expected decrease in revenue by approximately 25%-35% in 2025, the company’s operating performance is expected to remain strong over the next 12 months. This is largely due to the contracted or already closed sales of acreage in its Great Park Venture and the recently increased average selling price of finished lot sales.

Five Point Holdings’ assets are geographically concentrated in Northern and Southern California. These areas, including San Francisco, Los Angeles, and Orange County, are large population centers with diverse local economies. The company’s land pipeline is considered a strategic advantage due to strong fundamentals for new home demand while supply remains constrained.

The rating could be lowered if the debt to EBITDA approaches 6x over the next 12 months, EBITDA declines such that EBITDA interest coverage approaches 2x, or the company fails to develop its master planned communities as expected. Conversely, the rating could be raised if revenue and EBITDA become more stable and comparable to higher-rated peers, and profits from land sales significantly outperform expectations.

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