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Edited Transcript of FPH.N earnings conference call or presentation 13-Mar-19 9:00pm GMT

Q4 2018 Five Point Holdings LLC Earnings Call

ALISO VIEJO Mar 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Five Point Holdings LLC earnings conference call or presentation Wednesday, March 13, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Emile K. Haddad

Five Point Holdings, LLC - Chairman, President & CEO

* Erik R. Higgins

Five Point Holdings, LLC - CFO & VP

* Robert C. Wetenhall

Five Point Holdings, LLC - EVP of Capital Markets

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Conference Call Participants

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* Alan S. Ratner

Zelman & Associates LLC - MD

* Elad Elie Hillman

JP Morgan Chase & Co, Research Division - Analyst

* James A. Morrish

Evercore ISI Institutional Equities, Research Division - Analyst

* Michael Benjamin Eisen

RBC Capital Markets, LLC, Research Division - Senior Associate

* Paul Allen Przybylski

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Scott Evan Schrier

Citigroup Inc, Research Division - Senior Associate

* Timothy Ian Daley

Deutsche Bank AG, Research Division - Research Associate

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Presentation

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Operator [1]

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Greetings, and welcome to the Five Point Holdings' Fourth Quarter and Full Year 2018 Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

Today's conference call may include forward-looking statements regarding Five Point's business, financial conditions, operations, cash flows, strategy and prospects. Forward-looking statements represent only Five Point's estimates on the date of this conference call, and they're not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to the risks and uncertainties. Many factors could affect future results and may cause Five Point's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements.

These factors include those described in today's press release and Five Point's SEC filing, including those in the Risk Factors section of the most recent annual report on Form 10-K filed with the SEC. Please note that Five Point assumes no obligation to update any forward-looking statements.

With that, I'd like to turn it over to Bob Wetenhall, EVP of Capital Markets.

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Robert C. Wetenhall, Five Point Holdings, LLC - EVP of Capital Markets [2]

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Welcome, and good afternoon. For investors new to the story, I want to highlight that Five Point is an owner and developer of large mixed-use communities in California. Our communities are planned for more than 40,000 residential homes and 23 million square feet of commercial space in Los Angeles, San Francisco and Orange County.

I'm joined this afternoon by CEO Emile Haddad; CFO Erik Higgins; Chief Legal Officer Mike Alvarado; and our co-COOs Kofi Bonner and Lynn Jochim. I'm now going to hand it off to Emile, who will provide an overview of recent developments in our communities as well as expectations for 2019. Erik will then review our liquidity position and leverage as well as our fourth quarter and full year 2018 financial performance.

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [3]

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Thank you, Bob. Good afternoon, and thanks for joining us. 2018 was a foundational year in the execution of our long-term strategy of developing large-scale, mixed-use communities in major metropolitan areas in California. Our vision of building places where people can live, work, play, learn and connect is now a reality.

Let me illustrate by giving you an update on where we are in each of our communities. At the Great Park, we continue to see consistent home buying activity as reported by our guest builders. In the first quarter of this year, we sold 41 acres for approximately $218 million, which is planned for 7 products ranging from 1,500 to 4,200 square feet. This range of products provides a wide range of opportunities for buyers with a mix of incomes, generations and cultures. Some of these land sales will have phased takedowns, which maximizes the value per acre.

To date, we have approximately 3,200 families living at the Great Park; 775,000 square feet of occupied office and tech space at Five Point Gateway; a high school; 2 schools, kindergarten through eighth grade; the completed sports complex, which is twice the size of Disneyland; 75 acres of passive park; and the 12,000-seat Five Point Amphitheater.

Last week, our partnership with the Anaheim Ducks celebrated the grand opening of a 280,000 square-foot ice facility. This state-of-the-art venue is comprised of 4 ice rinks, which will be home to U.S. Figure Skating, where the Five Point Arena will host national and international competitions.

The Great Park is living up to its name. It's an amenity for our residents and provides economic benefits to our commercial users and to the rest of the region.

At Newhall in Los Angeles, land development is ongoing, and despite an unusually wet year, we are still on target to deliver homesites to builders by the end of this year in our first phase of Mission Village. Mission Village will have approximately 4,000 homes and 1.5 million square feet of commercial space. To date, we have moved over 35 million cubic yards of soil and started the installation of miles of pipes and roads. Our scale in our markets and long-standing relationships with large contractors have enabled us to make up for lost time due to the rain and to maintain very tight controls over budgets.

Finally, our net zero greenhouse gas emission program continues to be used by the state and the environmental committee as the example of how places should be built in the future.

In San Francisco, as you know from our prior calls, we are focusing our development activities at Candlestick, while the Macerich continues its evaluation and retesting of certain parcels at the shipyards.

As reported in the previously filed 8-K, we reached the conclusion that we will not move forward with the mall and mutually agreed to unwind the partnership with Macerich. We are working closely with the city to move forward with a revised plan for our first phase of Candlestick, which is currently comprised of approximately 750,000 square feet of office space, 1,600 homes and 300,000 square feet of lifestyle, retail and entertainment uses. We expect to receive the city's approval of this plan by the end of the year this year.

We also believe that in light of the high level of interest in office space in San Francisco by tech and life science companies and the challenges associated with the lack of housing, our waterfront mixed-use plan will provide the job-housing balance as well as the lifestyle and entertainment amenities connected to the city via a variety of means, including water taxis.

And as you may recall, our office space is exempt from the ordinance that limits all other prospective office developments in the city, which puts us in a unique position to deliver this office space to prospective users in 1 phase.

Finally, California has a new governor, who has prioritized the need for new housing that also meets the state's sustainability goals. Our communities are uniquely positioned to provide solutions to meet the state's goals.

Now let me turn it over to Erik, who will talk about our financial results, and we would be happy to answer your questions afterwards.

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Erik R. Higgins, Five Point Holdings, LLC - CFO & VP [4]

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Thanks, Emile. A summary of our financial results was included in the earnings release issued earlier this afternoon. Our financial performance in the fourth quarter as well as our 2018 annual results reflect our continued investment in our communities. As a reminder, our new home in San Francisco communities are wholly owned, and thus, consolidate on our financial statements. While the Great Park Venture and the Gateway Commercial Venture are unconsolidated entities that are accounted for using the equity method of accounting.

I'll first discuss our consolidated results for the quarter before providing a summary of our annual consolidated results as well as annual results for each of the operating segments.

Starting with year-end liquidity. As of December 31, 2018, total liquidity of $619.7 million was comprised of cash and cash equivalents totaling $495.7 million and borrowing availability of $124 million under our $125 million unsecured revolving credit facility. Most importantly, we are well positioned to continue investing in our communities and have enough capital to implement our plan of being able to have our first land sales at Newhall later this year. Total capital was $1.8 billion, reflecting $2.9 billion in assets and $1.1 billion in liabilities. Finally, debt to total capitalization of 24.6% was essentially unchanged from the end of the prior quarter.

Consolidated revenues for the first quarter totaled $7.9 million and primarily reflect recognition of revenue generated from management services. Our adoption of new revenue accounting guidance on January 1, 2018, has resulted in accelerated recognition of revenue from variable incentive compensation in our development management agreement with the Great Park Venture.

Equity in loss from our unconsolidated entities was $3.5 million for the quarter. $2.3 million of the loss was due to our proportionate share of the Great Park Venture's net loss during the quarter of $9.6 million after adjusting for amortization and accretion of the basis difference. $1.2 million of the loss was related to our proportionate share of the Gateway Commercial Venture's $1.7 million loss for the quarter.

Selling, general and administrative expenses were $15.2 million for the quarter. A tax provision of $9.2 million was recorded for the quarter as a result of an increase in our valuation allowance against our deferred tax assets emanating from tax law changes contained in the Tax Cuts and Jobs Act that limit the utilization of net operating losses occurring in our 2018 fiscal year and beyond.

The consolidated net loss for the quarter was $20.4 million, of which the loss attributable to the noncontrolling interest totaled $6.1 million, resulting in a net loss attributable to the company of $14.3 million.

Consolidated results for the year are as follows. Revenues totaled $49 million in 2018 and were primarily related to management services provided under our various development management agreements. SG&A expenses were $99 million for the year. Interest income related to our cash balances was $11.8 million for the year. Miscellaneous other income of $8.6 million reflects the sale of our TPC Golf Course in January as well as insurance recoveries collected during the year. Equity in loss from our unconsolidated entities was $2.2 million for the year. The consolidated net loss for the year was $67.9 million, of which a loss attributable to the noncontrolling interest totaled $33.2 million resulting in a net loss attributable to the company of $34.7 million.

Moving on to the segment results. The Newhall segment is a -- is consolidated for accounting purposes. Revenues for the Newhall segment were $6.4 million, which were primarily related to energy and agricultural leasing activity. Operating expenses related to the TPC Golf Course, which was sold in January, and expense related to agriculture and energy operations were $5.1 million. Selling, general and administrative expenses totaled $15.4 million for the year.

Other income of $7 million was related to the sale of the TPC Golf Course as well as insurance proceeds collecting during the year. The Newhall segment loss for 2018 was $6.7 million. Of the company's $1.7 billion inventory balance, which includes the consolidated inventory balance for the Newhall and the San Francisco segments, approximately $560 million is related to Newhall and represents a $197 million increase during 2018. As a reminder, Newhall's inventory was not stepped up to fair value as part of the business combination purchase accounting in May of 2016.

Moving on to San Francisco. The San Francisco segment is consolidated for accounting purposes. Revenues for the San Francisco segment in 2018 were $6 million and were primarily related to management services. Selling, general and administrative expenses were $23 million for the year. The San Francisco segment loss for 2018 was $18.1 million. The inventory balance for the San Francisco segment was $1.14 billion at the end of 2018, which represents a $73 million increase for the year.

The Great Park segment includes operations of the Great Park Venture, the owner of the Great Park Neighborhoods as well as management services provided by the management company to the Great Park Venture. As a reminder, we own 37.5% of the non-legacy distributions from the Great Park Venture and 100% of the management company. The operations of the Great Park Venture are accounted for under the equity method of accounting, and therefore, the assets and the liabilities of the Great Park Venture are not included in our consolidated financial statements. For reporting, we include the full results of the Great Park Venture at the venture's historical basis of accounting. The Great Park Venture is a soft funding operation with no debt.

Great Park segment revenues were $211 million for -- in 2018. The Great Park Venture sold 536 homesites on approximately 33 acres for $166 million. Approximately $35 million of the segment revenues were related to revenue recognized by the management company related to its services provided to the Great Park Venture. Cost of sales and segment expenses totaled $198.4 million.

Great Park segment income was $15 million, of which $3 million was related to the Great Park Venture operations and $12 million was related to the management company in connection with the services it provides to the Great Park Venture.

Our Commercial segment includes operations of the Gateway Commercial Venture and management services provided by the management company to the Gateway Commercial Venture. We own 75% of the Gateway Commercial Venture and 100% of the management company. The operations of the Gateway Commercial Venture are accounted for under the equity method of accounting, and therefore, the assets and the liabilities of the venture are not included in our consolidated financial statements. For segment reporting, we include the full results of the Gateway Commercial Venture at the venture's historical basis of accounting.

The Commercial segment revenues were $28 million for the year, of which $1.5 million were related to the management company in connection with services it provides to the Gateway Commercial Venture. Operating expenses, interest, depreciation and amortization totaled $28.3 million. Commercial segment loss for the year was $187,000. This is the result of an operating loss for the Gateway Commercial Venture of $1.7 million and a gain for the management company of $1.5 million.

Let me turn it back to the operator, who will now open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Alan Ratner with Zelman & Associates.

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Alan S. Ratner, Zelman & Associates LLC - MD [2]

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First question, just a quick housekeeping one. SG&A dropped quite a bit this quarter: $15 million. Had been running $25 million to $30 million. Is there anything unusual for this quarter? Or is this a good run rate to think about going forward?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [3]

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Well, this is -- Alan, this is Emile. I'll have Erik give you a little bit more color, but I think that you can't look at it as a run rate because some of it was due to the fact that some of the incentive program for management didn't hit its maximum target because we incentivize people based on goals and targets, and some of these targets did not get hit, and therefore, we didn't end up with the maximum value. Is that the right, Erik?

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Erik R. Higgins, Five Point Holdings, LLC - CFO & VP [4]

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So Alan, on SG&A, Emile's right. It's hard to -- we're not going to have a consistent run rate just because our communities are in a different stage of development. And our SG&A is not just people and associates, it also includes a lot of other expenses. Basically anything that we don't capitalize to inventory hits this line. So it includes marketing expenses, professional fees, consulting services and so forth. So the decrease year-over-year was primarily related, as Emile mentioned, to long-term stock compensation expense being reduced because of the awards that were granted in 2017 as well as a decrease in the amount of legal expenses that we capitalized, as we get through the litigation at Newhall. So that's the primary difference for their reduction.

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Alan S. Ratner, Zelman & Associates LLC - MD [5]

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Okay. Great. That was helpful. I figured that was the case, but helpful to hear it. Second question. I was hoping maybe you could give us a little bit more color on the process of the land sale at Great Park. I believe you had mentioned -- previously, you were expecting that to occur in the fourth quarter. Looks like that got pushed a little bit, and you're providing some terms to the builders. So I was curious, is that just a function of the tighter environment? Lot of builders have mentioned being a bit more cautious on underwriting. And maybe just talk about the bidding process in general.

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [6]

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Yes, I mean, I think that's the -- those are 2 separate questions. One is the timing of when the sales happen and the other one is the terms that we ended up with. In the terms of the timing, it's not a surprise to you, Alan, that a lot of the builders wanted to have the closing happen not by year-end. And the good news for us is we have the luxury to accommodate the builders and make sure that nobody feels pressured to close before they can close. So the pushing of the timing of the closing was really an accommodation to the builders, who wanted to see the closing happen after year-end. In terms of the terms, look, right now, our focus is on maximizing the value we receive per acre. And when we look at the value we got from at least 1 builder, who wanted to have to a 2 takedown versus 1 take, we felt that the return on the investment for us in terms of allowing that to happen was a very attractive one and it worked for our builder and worked for us. We view that as a win-win. Let me just give you a feel because I think it's an important point to make because we keep on talking about absolute dollars. Our range of value in the last sale we did was $4.4 million to $6.6 million per acre based on the different product lines and that's what averaged $5 million. Today, we're at $4.2 million to $7.5 million an acre. So some of what you're seeing in terms of the increase in value per acre is, obviously, derived from terms, but a lot of it comes from the fact that we're starting to see premium for people to live in this community because of all the amenities that had been built as well as market movement as well.

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Alan S. Ratner, Zelman & Associates LLC - MD [7]

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And if I could sneak one last one in. How many builders were in this round of lot sales at Great Park?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [8]

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Well, this -- the closing, of course, right now have 2 builders, but we expect to have other builders as we go through the -- a complete round of sales.

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Operator [9]

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Our next question comes from the line of Stephen East with Wells Fargo.

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Paul Allen Przybylski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [10]

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This is actually Paul Przybylski on for Stephen. Staying on the topic of the Great Park takedowns, how should we think about that impacting the income statement in '19 on a quarterly basis? And then does that stretch out any future expected sales that you were anticipating in '19 and push those into '20?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [11]

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Look, I think that in terms of sales, we're going to time the sales based on the velocity of absorption and making sure that we maintain the right balance of supply versus demand. So far, everything seems to be working according to previous projections. But at the same time, if we find ourselves with a sale that might not be optimum for builders and we would like to push it a week or 2 or even a quarter, we're going to do that to make sure that we don't compromise the overall integrity of the master plan. So we don't tend to look at these things in terms of fixed days of deliveries. We will look at them as to when we can optimize value and making sure that our builders are building -- are buying in ways that are going to allow them to also not trust their own financials. So that that's in terms of the timing of delivery. So we really are not basically looking at this as per numbers, work days, I mean.

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Paul Allen Przybylski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [12]

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Okay, okay. And then for the lot sale at Newhall later this year, any color you could provide on maybe expected revenue, number of lots, margin, ASP? What's your plans right now?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [13]

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No, I think it's really premature to talk about margins and revenues and all that. I think, so far I can tell you, we have now engaged the builders for second time and we're talking to our -- some of our guest builders at the Great Park, who have been great performers. And there's a great amount of interest from the building community in being in Newhall. As you know, L.A. doesn't have a lot of supply. Actually, doesn't have any supply, and it has a huge amount of demand. So it's been building up that pent-up demand as a result of the imbalance. In terms of number of homesites delivered, look, we still are in the rainy season, and as much as we have been able to maintain our schedule, I don't want to go ahead and jinx things, but I think that my expectation is that we will deliver probably somewhere north of 500 homes -- homesites, I mean.

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Operator [14]

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Our next question comes from the line of Mike Eisen with RBC Capital Markets.

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Michael Benjamin Eisen, RBC Capital Markets, LLC, Research Division - Senior Associate [15]

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Just wanted to start off following up on that prior comment of the 500 homesites potentially from Newhall. Can you talk to, with all the development activity that's going on, what the acreage of land that you think can realistically be ready to be passed over to builders either in the next 12 to probably 24 months?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [16]

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I can give you that number if you give me a second. Somebody here will help me with that. I can -- I don't have it in front of me, but just bear with me, we'll get you that acreage that we're expected to develop, although it is in flux because, as I said, it all depends on how quickly we get to it. But I can tell you how many acres we are developing in total right now if you are interested in that. [Here, I'll take this...] Okay, just if you have another question go to it. I'll get back to give you the acreage after we look at our...

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Michael Benjamin Eisen, RBC Capital Markets, LLC, Research Division - Senior Associate [17]

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Sure. And then -- okay. And then in -- you made the comments that in Great Park, the case of land sales for '19's going to be dependent on the takedowns and absorptions through your builder partners and just touring some other communities in the region, there's definitely been a slowdown over the last 6 months or so. So can you talk to kind of what the trends you're seeing from buyers and the pace from your homebuilder partners in the Great Park area and how that's trending year-to-date?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [18]

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Sure. First of all, let me make sure I clarify what I said, the takedowns are -- we have 1 builder that's requested 2 takes, so this is not a rolling option takedown where they have the ability to meet their takedown based on their absorption. What I meant is absorption is, I meant, we monitor the rate of sales of the builders and make sure that when we bring in new community online, it dovetails well in terms of one community selling up and another one coming online, so we don't have a lot of overlap. So this is not -- the builder is having an ability to be there when they takedown. In terms of activity, yes, we have seen really a very consistent performance in terms of home buying. We're very cognizant of a lot of the -- what we're hearing about the market in general in the United States and certain other markets in California. But honestly, we haven't seen it. We had one of our best sales months at our active community today, Cadence and the Great Park, and February was one of our best months. So we haven't seen it. We see the numbers every week in terms of sales. We know what the builder's profitability looks like. And so far, it looks like the Great Park is performing in a very consistent way to previous sales. Do you have that number up here? We got that. So the total number of acreage that we could be delivering to builders is, call it, somewhere around 40 to 45 acres. That's what I'm shooting for. And obviously, I'm hoping that if we can keep on doing what we've been doing, we can actually deliver more acreage than that.

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Michael Benjamin Eisen, RBC Capital Markets, LLC, Research Division - Senior Associate [19]

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Got it. Those are very helpful comments. And then one more if I could sneak in maybe it's for Erik. Erik, when you think of the liquidity position and you talk to that you guys would be self-sufficient through the first sale in 2019 from Newhall, if that sale were to be pushed out, how long do you think you guys can develop with your current liquidity before needing to find extra funds before land sale?

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Erik R. Higgins, Five Point Holdings, LLC - CFO & VP [20]

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Yes, so we'll have plenty of liquidity. I mean, we, obviously, plan for those types of things. The bulk of our expenditures are discretionary. And so if we feel as if those land sales are going to be pushed out, we can manage our spend accordingly. But at this point, we don't see any -- have any real issues with liquidity to get to those land sales, whether they're at the end of the year or delayed.

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [21]

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Let me add to that because that's a very important question, and it's probably a critical to do business with them. We monitor the market constantly. We're talking to builders constantly. We will know very quickly what the appetite of the builders is and where their mind is in terms of year-end closing. Two thirds of our expenditures are that -- that's variable cost. We have an ability to shut down that cost with a 30-day numbers. At Newhall, the grading -- most of the grading is done. The mass grading is done. So now we're into the infrastructure phase. And let's assume that we figure out that maybe the appetite is not there for 500. Maybe it's 300. We will know way ahead of time of committing to that expenditure. And we will make sure that the dollars that go in will be exactly the amount of dollars we need to put in that give us comfort that we're going to generate the revenues out of it. So this is not an autopilot business by any stretch of the imagination. We are monitoring all of that and we will not commit to spec infrastructure, hoping that we'll be able to get the revenues. And that's key to how we run the business.

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Operator [22]

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Our next question comes from the line of Scott Schrier with Citi.

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [23]

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I wanted to ask a little more about Newhall and San Francisco. And I know on Newhall, you said it's too early to start talking about margins for those land sales. But I'm curious what you're seeing from, in terms of appetite and demand? Whether you might see some pressure on land prices versus where you thought things were shaping up a year ago? And if there's any changes, obviously, a lot of builders are starting to put more affordable product in the ground. Is there any pressure or willingness from builders that are trying to change up plans a little bit to potentially reduce the ASP of the homes that they're going to build in the communities?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [24]

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Well, so let me -- first of all, we control the product and the product segmentation. Right now, our first phase of delivery could be anywhere between 7 to 15 different products segmented very carefully. So we will have a very wide range of product offerings for builders to look at. If we feel like there's more of an interest in a certain size product, then we will lead with that. The answer to the first part of your question is, no, we haven't seen any pushback from the builders. As a matter fact, we're seeing a very high level of interest from builders just because there's nothing else in L.A. And a lot of the builders had to shut down their operation in Los Angeles and start operating if they have 1 or 2 communities up in that market, they would operate in the market of either Orange County or the Inland Empire, and there's a great amount of interest from builders to have a presence of their Inland operation. And one of the things that we have an ability to do is talk to them about a strategic relationship, that's a long-term relationship, where they know they're going to able to get land for the next decade plus, and as a result, can make commitments to the marketplace both in terms of talking to trades as well as having local market experts. Both those issues help the G&A and the cost structure of the builders, and therefore, it aligns our interests with them. So your question is a good one, but I want you to think that we're not a -- selling land 1 time, and therefore, we're going to sit down with the builder, and builder says, this is all I can pay you. We're sitting down with the builders saying, we can provide you with a pipeline of land for 1 time, and here's how we work together as partners to make sure that you execute on your business and we execute on ours. And we have proven that at the Great Park. Today, if you look at our value that we sold at the Great Park, it's higher than the value we sold more than a year ago, despite all the market statements that are being made. So we believe that it is fundamental to our business to have that partnership with the building community, and we expect to take it all up to Newhall and expand on it.

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [25]

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Got it. I mean that was great color. I just wanted to follow-up and ask a little on the commercial side of things. Obviously, you spoke about your 8-K and your decision with respect to the mall with Macerich. What, broadly speaking, when you look at your commercial opportunities and you spoke about certain office opportunities. How much flexibility do you have in terms of changing the plans? And if you've seen any more noticeable trends over the past 6 to 12 months that changed the way you think about the commercial piece in any way?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [26]

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Yes, I mean, I think that we've said before that the advantage we have is, we have a great amount of flexibility to move the uses around. Probably, the best example is actually San Francisco, where we had a mall that was designed with apartments, with condominiums, with a entertainment center, all-in-one design and was approved in 1 configuration. Then as a result of a lot of the discussions we had with Macerich, we went back and revised the plan, and we were able to capitalize on that flexibility to get the plan revised and go through the city's approval. And here we do it again on a third time. So we have the ability both from an entitlement point of view to move uses around, but more importantly, from a relationship point of view, we have the ability to have discussions with our public partners on the city side to talk about why we want to make sure that the uses are more in line with current demands. As to the second part of your question, the answer is, yes, and that's why we have spent a lot of time evaluating a outlet mall versus not. And we decided that where we see the trends today is more shifting to office space in San Francisco. But as I said in my remarks, the challenge with office space in San Francisco is that providing housing for employees and schooling and open space and parks are not available. And that, by the way, is consistent in every city where people seem to want to relocate office space. What we believe we're doing over here is we're providing in the first phase an ability to deliver to somebody 750,000 square feet in 1 phase if needed, 1,600 homes, lifestyle, entertainment, connectivity to city, both by road, by rail and by water taxi and provide a very unique opportunity for somebody to come and build the campus. That's really what we see as the golden opportunity for us here, and that's why we decided to pursue this plan.

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Operator [27]

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Our next question comes from the line of Stephen Kim with Evercore.

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James A. Morrish, Evercore ISI Institutional Equities, Research Division - Analyst [28]

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This is actually Trey on for Steve. I want to start with talking about that -- the former Macerich plan. So first, is there a -- any financial penalty between you and Macerich that -- that's need you to pay them or they need to pay you as a result of moving away from having the mall in shipyard?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [29]

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Well, no, no, there's no penalty. We disclosed all of that in the 8-K. It's already done. Macerich had the $65 million investment. That was made more than 4 years ago. We gave them back the $65 million plus $6 million, so they got $71 million and that was the amount we gave back to them to unwind and take back 50% of the land that basically was sitting under their 50% interest and that's the end of it. So from our perspective, there's no -- nothing else here and everybody's moving forward.

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James A. Morrish, Evercore ISI Institutional Equities, Research Division - Analyst [30]

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Got it. And the former plan with the mall and the townhomes and condos attached to it. In this new footprint that you're designing and you're taking to the -- to San Francisco, is there a change in the number of apartments or homesites in that plan compared to the previously approved plan?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [31]

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No, there isn't in the total. I mean, what I was talking about here in terms of this -- the makeup of the uses is the first phase that we're moving forward with. But, obviously, Candlestick has much more than what I talked about in terms of all these different users. This is just the first phase, which takes basically, the footprint of Macerich and expand it a little bit to include a couple of other areas and that's what become the first phase. So think about this as the first phase of Candlestick, which is a replacement to the outlet mall, which is going to have this mixture of uses.

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James A. Morrish, Evercore ISI Institutional Equities, Research Division - Analyst [32]

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Okay. And then lastly, should we expect there to be any homesites delivered in Candlestick this year? Or are we looking at 2020 when those will first start to roll through?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [33]

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No, you should not expect any deliveries this year. I think what you should expect is, we finally now have made a commitment to a plan that we are going to be moving forward with. That plan is already in process with the city, and we are right now saying that we will have it approved by the end of the year, which then will inform us as to the timing of moving forward to the development in 2020 and beyond.

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Operator [34]

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Our next question comes from the line of Nishu Sood with Deutsche Bank.

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Timothy Ian Daley, Deutsche Bank AG, Research Division - Research Associate [35]

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This is actually Tim Daley on for Nishu. So I guess, my first question. Erik, you mentioned that you all had adopted new accounting standards at the beginning of the year. And we've heard from various builders that their adoption of ASC 606 has driven some lumpiness in the timing of SG&A and gross profit recognition, particularly those that are doing a lot more heavy development activity or opening a lot of communities in the -- at the beginning of the year. So given the long duration and larger side of your -- size of your development projects, obviously, recognizing you're not the one building the real models or opening the communities themselves. But should we be expecting any sort of changes in how costs and expenses are recognized under this new accounting standard compared to pre-adoption, I guess?

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Erik R. Higgins, Five Point Holdings, LLC - CFO & VP [36]

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No, I don't think so. I mean, the big impact for our company was recognition of revenue related to management services that we provide to the Great Park Venture. And so as part of implementing the new revenue standard, we recognize revenue in advance of the actual collections. And so you'll see the revenue on our P&L, and then you will see a large contract asset in our related party asset line item. But that's been the real impact of the revenue -- new revenue standard for us.

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Timothy Ian Daley, Deutsche Bank AG, Research Division - Research Associate [37]

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All right. Now that's helpful. And then, I guess, kind of more on a high-level basis. We've heard that from some builders and developers that they're starting to see a bit more labor inflation creeping into those trades, particularly in grading and earthwork, seeing a bit more inflation on the labor side of things. So just curious, are you seeing that in your projects across the kind of labor that's doing the development? And I guess, if you could help that with a rate of increase if you have that would be helpful.

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [38]

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Sure. Well, the answer is no. And our operation, as I said in the past, is much more relying on equipment than labor. However, what I was saying in my opening remarks about our scale and our communities and our long-standing relationship with contractors, really has allowed us to lock in on prices and give contractors a very long-term contract, and therefore, protect ourselves and provide jobs. Today if you go to the Newhall, we have over 150 pieces of equipment that are moving dirt over there. That's a totally different position to negotiate from with your contractors than if you're doing a grading job for a 100 or 200 homesites where you have 2 scrapers working. So that -- that is probably true for some people who are doing smaller size development, where it's only contract-by-contract. Well, that's not the position we're in because our relationship with our trade is more of a long-term partnership relationship and it benefits both.

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Timothy Ian Daley, Deutsche Bank AG, Research Division - Research Associate [39]

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I know that's helpful details. So and then just 1 more quick one. It seems from your commentary that the demand for commercial space in San Francisco continues to be pretty strong. So just curious as to what did you see the market achieve in terms of price per square foot growth in the San Francisco market this year?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [40]

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Well, do you mean on the commercial or residential?

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Timothy Ian Daley, Deutsche Bank AG, Research Division - Research Associate [41]

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On the commercial side of things, right.

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [42]

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Yes. We're not yet in the space in terms of activity of leasing or selling. So I don't want to be speculating on that. We're very much focused right now on the first part of your statement, which is the amount of demand that we're seeing and the challenges that people who are looking for that are facing in terms of, as I said, housing for their employees and other things that are essential to making sure that they have a full package for that employee. So our focus has been more on the demand and how do we actually provide the right supply for that demand and be able to provide it in a way that is much more complete than just simply building office space in Downtown San Francisco, but we haven't gotten to the numbers yet.

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Operator [43]

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(Operator Instructions) Our next question comes from the line of Michael Rehaut with JP Morgan.

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Elad Elie Hillman, JP Morgan Chase & Co, Research Division - Analyst [44]

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This is Elad Hillman on for Mike. I just wanted to dig in a little more on Candlestick, recognizing that's still early, but is there any indication for how we should think about the capital requirements in your new plan? How would you think they could be higher, lower, roughly similar to the capital requirements compared to the old plan? And in a similar vein, is there potential for you to find a new partner at Candlestick? Is it something you're actively looking for? Or do you feel like the new plan will get executed fully in-house?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [45]

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Well, the only thing that you should think about in terms of capital needs is what is needed this year to get the approvals. Before we pull the trigger and move forward with development, we would be evaluating the capitalization of these uses and all of the opportunities around the table, whether we decide to go with a partner or multiple partners based on the asset classes or whether that could be an interest on somebody who would like to have a build-to-suit because of the nature of what we're doing. But those are discussions and those are decisions that we will make prior to the end of the year once we're much closer to the approval and we have something actually to go and talk to people about. But all of these are options that are on the table for us to evaluate and make decisions on.

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Elad Elie Hillman, JP Morgan Chase & Co, Research Division - Analyst [46]

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Okay. And lastly, have you received any update in terms of the retesting plans shifting over to shipyard? Any retesting plans update from the Navy or indication of when the land could potentially be delivered?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [47]

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No. We haven't received any indication from the Navy, any updates from the Navy. I mean, nothing has changed. But again, I want to make sure that I keep on underscoring the same point. Our takedown from the Navy is going to be when the Navy is ready and everybody signs off and there's no more ambiguity as to whether there is a part of it that's cleaned up to a certain standard or not. So we don't own those -- that land. It's still in the ownership of the Navy. And we will make sure that before we take it down that all the issues that are in question have been answered completely. In the meanwhile, even if we were to take the land today, our focus has shifted to Candlestick and expect us for this coming several years to be talking about Candlestick regardless of whether we can or cannot take a pieces of land down at the shipyard. Our focus for the next several years is going to be on Candlestick.

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Operator [48]

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Ladies and gentlemen, we have reached the end of the question-and-answer session. And this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [49]

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Thank you.