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Edited Transcript of FPH.N earnings conference call or presentation 8-Nov-19 6:00pm GMT

Q3 2019 Five Point Holdings LLC Earnings Call

ALISO VIEJO Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Five Point Holdings LLC earnings conference call or presentation Friday, November 8, 2019 at 6:00:00pm 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

* Christopher Frank Kalata

RBC Capital Markets, Research Division - Assistant VP

* Elad Elie Hillman

JP Morgan Chase & Co, Research Division - Analyst

* John Moran

* Nathaniel Redleaf

* Paul Allen Przybylski

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Samuel Thomas McGovern

Crédit Suisse AG, Research Division - Research Analyst

* Stephen Kim

Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team

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Presentation

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Operator [1]

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Greetings, and welcome to the Five Point Holdings Third Quarter 2019 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. Today's conference call may include forward-looking statements regarding Five Point's business, financial condition, operations, cash flows, strategy and prospects. Forward-looking statements represent only Five Point's estimates on the date of this conference call and are 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 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 filings, including those in the Risk Factors section of the most recent annual report included in Form 10-K filed with the SEC.

Please note that Five Point assumes no obligation to update any forward-looking statements. I'd now like to turn the call over to Bob Wetenhall, Executive Vice President of Capital Markets. Please go ahead, sir.

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

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Thank you, operator. This morning, I'm here with our CEO, Emile Haddad; our CFO, Erik Higgins; our Chief Legal Officer, Mike Alvarado; and our co-COOs, Kofi Bonner and Lynn Jochim.

Emile will now provide an overview of recent developments. Eric will then review quarterly financial performance.

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

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Good afternoon, and thank you for joining us. Operationally, this has been a very busy quarter for the company. In Valencia and Los Angeles County, we continued our land development activity, and we remain on schedule to deliver our first homesites to build those next month. This fourth quarter will be a major milestone for the company as we start generating revenues in Valencia after many years of litigation. Valencia will be the biggest provider of residential homesites in Los Angeles County and will be another Five Point mixed-use community with recreation, entertainment, retail, hospitality and high standards of public education. Anyone who visits the Great Park in Irvine can see proof-of-concept of how we build communities. At our Great Park community in Irvine, home sales by our guest builders remain consistent with seasonal trends. We received approvals last month from the city to move forward with 125,000 square foot fitness facility, which will be a build-to-suit for a nationally recognized blue-chip brand. We also received approvals for a 428,000 square foot mixed-use retail and commercial center. That includes 180 room extended stay hotel and 161 room boutique hotel that will be built adjacent to the Sports Park and the Five Point Ice Arena, which showcases our partnership with Anaheim Ducks.

Finally, we received approvals to build a state-of-the-art field house as well as a world-class aquatic center, which will be both the new home of the U.S. National Water Polo team and will be part of the Los Angeles 28th Olympic program. These facilities will complement the existing sports complex and will not only create high demand for our retail and hospitality development to be located across the street, but will also add tremendous value to our residential neighborhoods.

In San Francisco, we received approval for the revised plans for our first phase at Candlestick. This first phase is comprised of approximately 1,600 homes, 750,000 square feet of office and 300,000 square feet of lifestyle retail-focused mainly on food and beverage.

As we look ahead, we believe that we are in a unique position to capitalize on some of the best assets in the country in some of the most dynamic markets. Our balance sheet and liquidity afford us the ability to opportunistically build millions of square feet of commercial space in our communities in the near future that complement our existing Five Point Gateway campus in Irvine. During the past 18 months, we have seen a big disconnect between the value of our assets and the price of our stock. We acknowledge there are a variety of factors that have created frustration for our shareholders.

2020 will be a pivot year for the company. In the early part of the year, we will hold an Investors Day, shed more light on what's ahead, answer any questions you have and show the real value of the company. More information will be forthcoming, but I can speak for our whole team, when I say, that we are looking forward to sharing more fully the vision to which we have dedicated most of our carriers. Erik?

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

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Sure. Thanks, Emile. A summary of our financial results was included in the earnings release issued earlier this morning. Our financial performance in the third quarter reflects continued investment in horizontal development at Valencia and the recognition of management fees. The Great Park venture closed on 89 home sites, representing the final takedown of a land sale that was announced in the first quarter. Additionally, as previously announced, the company closed on a $125 million add-on to its 2025 senior notes in July. I'll start with our consolidated results and then address each of our 4 segments and then conclude with some comments about our balance sheet and liquidity position. The company's consolidated revenues for the third quarter totaled $12 million and primarily reflect recognition of revenue generated from management services. Revenues from land sales at Great Park venture and rental income from the commercial -- from the Gateway Commercial Venture are not reflected in our consolidated revenues, as we account for our investment in both ventures, using the equity method of accounting. However, due to our role in managing both ventures' operations, we include these revenues in our segment results, which I'll discuss shortly. Equity in our loss -- equity and loss from our 2 unconsolidated entities was $1.8 million for the quarter. We recognized $0.7 million in loss due to our proportionate share of the Great Park venture's net loss of $2.4 million for the quarter after adjusting for the amortization and the accretion of the basis difference. Further, our share of the Gateway Commercial Venture's $1.4 million loss was approximately $1.1 million for the quarter.

Total consolidated costs and expenses were approximately $35 million, including $25.9 million of selling, general and administrative expenses for the quarter. Net loss for the quarter was approximately $23 million, of which $12.3 million was allocated to our noncontrolling interest, leaving $10.5 -- $10.7 million attributable to the company.

Moving to the segment results. The Valencia segment is consolidated for accounting purposes. Significant expenditures on land development continued in the third quarter as we work to prepare the first phase of the community for land sales to homebuilders later this year. Revenues for the Valencia segment were $0.2 million, primarily related to agriculture and energy operations. Selling, general and administrative expenses totaled $3.7 million for the quarter. The Valencia segment loss for the quarter was $4.9 million.

Moving on to San Francisco. The San Francisco segment is also consolidated for accounting purposes. Revenues for the San Francisco segment were approximately $1 million and were primarily related to management services and marketing fees recognized from prior period land sales. Selling, general and administrative expenses were $4.4 million for the quarter. The San Francisco segment's net loss for the quarter was $3.7 million. 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 percentage interest in the Great Park Venture and 100% of the management company. The Great Park Venture is an unconsolidated entity with our investment in the venture accounted for under the equity method of accounting. For segment 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 self-funding operation with no debt. The Great Park segment revenues were $49.5 million in the quarter, of which $38.6 million was related to the Great Park Venture. The Great Park Venture closed 89 home sites during the quarter. The initial gross proceeds from the sale were $53.3 million -- I'm sorry, $35.3 million, representing a base purchase -- the base purchase price.

In addition to the base purchase price, the Great Park Venture recognized approximately $0.8 million in estimated variable consideration from marketing fees it expects to be entitled to receive. The gross margin on the sales in the quarter for the partnership was approximately 32.3%. Net income for the Great Park segment totaled $1 million for the quarter, comprised of approximately $3.3 million of income related to the management company for services it provides to the Great Park Venture, offset by $2.4 million net loss from the Great Park Venture's operations. 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 Gateway Commercial Venture is an unconsolidated entity with our investment in the venture accounted for under the equity method of accounting. For segment purposes -- for segment reporting, we include the full results of the Gateway Commercial Venture at the venture's historical cost basis. Commercial segment revenues were 87 -- I'm sorry, were $8.7 million for the quarter. Operating expenses, interest, depreciation and amortization totaled $10 million. Commercial segment loss for the quarter was $1.3 million, comprised of $0.1 million of income related to the management company for management fees, offset by $1.4 million loss for the Commercial Gateway Venture operations. I'll wrap it up with a few comments related to the balance sheet and our liquidity position. As of September 30, 2019, total liquidity was approximately $454 million, which was comprised of cash and cash equivalents totaling $330 million and borrowing capacity under our $124 million -- our $125 million revolver. As previously announced, in July, the company closed on $125 million add-on to our 2025 senior notes, increasing our liquidity.

Our debt to total cap ratio was 25.1% at the end of the quarter. With that, I'll turn it back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Alan Ratner with Zelman & Associates.

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

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So first off, great to hear that you're still on track at Valencia for those lot sales before the end of the year. I'm assuming, based on that, that fortunately, it sounds like the fires didn't affect you guys there much with the timeline. Is there any color you can just provide at this point? I mean, we're 6 weeks before the end of the year. And just in terms of how many lots sales -- or how many lots should we expect in this round? And any information on the type of product that will be in the initial phase? Any economics behind that you can share with us, I think, would obviously be very helpful.

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

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Alan, this is Emile. Nice hearing from you. Well, first of all, we have not been impacted by the fires and thank God that's not close to us. There are new development builds to the higher -- different standard. And therefore, we feel much more comfortable in new development with all the requirements we have to go through for fire buffers. In terms of color, we've always guided up to about 500 home sites. I think I'm confident that we will be above that number. I can't yet share what the number is, but I think we're going to be above that number. In terms of products, there will be multiple products, probably more than 7 or 8 products, somewhere in that range, at least, that we will doing, which provides for the proper segmentation. And cover the wide range of pricing that we always aim at, as you recall, we try to target about 40% of the -- start from 40% of the median home price in our marketplace to about 1.7. And I think this initial product offering will be covering those type of ranges. I can't talk about the economics yet since we haven't closed, but stay tuned and by the time we report the fourth quarter, you'll be able to see why we've been excited and waiting for Valencia.

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Alan S. Ratner, Zelman & Associates LLC - MD [4]

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Okay. We are eagerly awaiting. I appreciate that Emile. Second question. You guys were in the Capital Markets during the quarter with the tack-on. And I'm just curious if there's anything you could share maybe forthcoming on the Commercial side that you saw an opportunity to raise that capital? Or is that just more kind of being proactive for opportunities down the road? And I guess, just generally, how you're thinking about the commercial opportunity at this point?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [5]

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Sure. So we talked about that the last quarter as questions were asked about why did we raise the additional $125 million. And I said, we really were giving ourselves capital that allows us to start capitalizing on our commercial opportunities, now that we are in a position to have several million square feet built over the coming 3 or 4 years. Opportunistically, we are not going to be building on spec. And we have at least now one deal is done, and we're going to have our loans done. And then we have 2 or 3 others in the works that will be build-to-suit. And currently, we intend to use the cash on the balance sheet as our equity. And we will do construction financing, and then later on, convert that to permanent -- that based on market availability and what the market will provide. And that really was the main reason why we raised the $125 million as to make sure that we have the equity between that and the land value to be able to move forward. So I think you should expect us over the coming 3, 2 or 3 or 4 quarters to be daylighting more commercial opportunities as they get finalized.

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Operator [6]

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And next, we'll go to Stephen Kim with Evercore.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [7]

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Yes, looking forward to 2020, it looks like it's going to be a pretty interesting year for you. Two general questions. I had one on the Commercial side. The other one on Valencia and long-term planning there. I guess, if we start with the Commercial. I was wondering if you could update us. I think the last we heard from you Gateways NOI in 2020, $27 million, still wondering if that's a good estimate. And also, if you could give us some sense of when we might see the first recognized revenues in NOI in Great Park, non-Gateway, Great Park assets, as well as new hall and shipyard? And I guess, I might as well throw in, if there's any comps to help us sanity check longer-term -- our longer-term outlook for NOI and NOI growth in the division?

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

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Sure. Stephen, so look, as I said, I think we are going to be looking at each of our commercial opportunities in a very strategic way. We announced the City of Hope deal. And hopefully, we'll get the approvals very quickly to convert the building from office to medical, and that has now become a catalyst for a much larger health care opportunity that we have with the Great Park. And as we finalized some of these discussions with some of these health care providers, we'll be able to give you a little bit more color on that. We also -- now that we've completed the sports complex and the Ice Arena, and now that we have the Water Polo facility and the field house, we have a very high amount of people that go to all these facilities, and that's why we're building the commercial and hospitality across the speed. So we're going to look at each of these opportunities individually and look at it strategically, the same thing with Valencia. But let me back up this by saying, as we now complete the development in Valencia. And as we now have developed the land over here in the Great Park, we think we have an ability to build more than 2 million, 2.5 million square feet and complete them within the coming 3, 4 years. That doesn't mean that's what we're going to do. But that opportunity is available. And I think that then starts giving us the opportunity to keep on growing that Commercial portfolio. Yes, we expect to be getting returns that are very consistent with what the market expects. And the good news is we own the land. So we feel extremely comfortable that we have an ability to start building our NOI as we talked about during the roadshow, we are very consistent to have exactly our strategy we talked about. And we are fortunate enough to have an ability to be very opportunistic and very strategic about those.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [9]

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So Emile, just following up on that. So the 2 million to 2.5 million square feet of commercial that you said you have the ability to build. My guess is that -- that -- well, can you give us a sense for how you might see that broken up between the various assets. And in particular, when do you think we might see the first revenues out of those assets. Is that a 2020 event? Or do you think maybe in the case of Great Park? Or do you think it will be further out than that. And same with Newhall? And if you could have -- sort of guessing, shipyard, just so -- for our modeling, what year we could maybe begin?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [10]

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Yes. I don't think you should expect anything in 2020. I think that what we are -- we'll be doing right now is we have the approvals, and we have deals in the works. I think a good part of 2020, we'll be doing all the engineering and the planning for all these opportunities and hope to start sometime in the later part of '20 on some of them and/or early part of '21. And you assume that these type of deals take about 18 months to 2 years to build. So we're talking about -- when you start seeing major growth in our NOI will be more in the early 2022, probably late '21, early '22 period. And the good news is at that point in time, there is a long runway of ability to keep on growing that NOI.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [11]

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Excellent. Second general set of questions related to, I guess, particularly Valencia, I'm curious about -- do you have the ability with these unique assets, given their size and scale to really get in front of some of the changes that we're seeing in terms of how people are choosing to live. And we've actually seen over the last decade, a pretty dramatic shift in the marketplace. And I'm curious as to whether or not you have been able to prepare and engineer your projects to future-proof them in a way for some things, as you know, I think you've talked in the past, you've got electrical vehicles or even autonomous vehicles and the implications that might we have or how you might develop portions of the community. I was wondering if you could speak to that. And also single-family build-to-rent multi-generational housing, all these kinds of things. I was wondering if you had any thoughts on how to -- your communities might be able to optimize or be optimized for some of the changing preferences, which ones you think are important and how you would be able to adjust your planning for those?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [12]

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Sure. Well, if you look at what we have done at the Great Park, that is a good example of how we keep on working on products to meet existing market conditions and look forward. So we have several multi-generation products over here. We have a very wide ethnic buyer group at the Great Park. And therefore, we have homes that have an ability to deal with a lot of cultures, including master bedroom down, master bedroom up, units within 2 kitchens, some for heavy cooking. We are constantly listening to what the market is telling us about our buyers, although we don't build the homes. But as you know, we design the -- actually the homes themselves in partnership with our builders. Everything we do here in our market is [functional], because this is a big market that is part of that culture and belief. And as we start building up in the -- in Valencia, we are doing the same thing. Our biggest focus right now is to make sure that we build enough of a range of product offerings from the pricing point of view and lifestyle. To appeal to a wider base than most developments can do. As you know, we are at the point in the cycle right now where land prices have pushed up, and it's pushing a lot of the builders to start building bigger homes, more expensive to be able to justify the pricing of land, and that's actually starting to foreclose all the opportunities for a wider base of buyers that doesn't -- don't have the ability to buy that type of a product. The luxury, we have because of the size of our communities and our ability to bring multiple products online at the same time, is we can actually start building from, as I said, 40% of median home price in our market, up to 1.7%. If you come to the Great Park today, you'll be able to visit about 50 different models that go -- cover the whole range, both in terms of lifestyle and in terms of size. But we are also very carefully looking at efficiency of space. One of the things that has happened over the years is the fact that the size of the home started growing because it was more the entertainment place. And now we're trying to harvest space to make it more efficient. If you see our homes. You will see that we eliminated a while ago the formal living room and replaced it with more -- in an outdoor room, larger even laundry space. So we are constantly looking for efficiency of the space because our space is very expensive. At the same time, when we look at -- looking forward in terms of electric vehicles, Valencia will be the first city of its nature, that will be a net 0 greenhouse gas emission community, and it's being used as an example, every home will have a charging station. We will have 2,000 charging stations within the community, homes will come with parking for electric vehicles, we are very much focused on that. But realistically, you can't just assume that the autonomous car is going to be around the corner and start designing for that because we're not there. So we have to be able to provide for flexibility in the future. But not be too far into the future in our design. Otherwise, we're not going to be realistic. So we can spend as much time off-line on that. As you know, I am very much involved in every one of these things and looking into the future and demographics, but that's some of the things that we do, and I hope that helps.

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Operator [13]

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All right. We'll go to our next question. Chris Kalata with RBC Capital Markets.

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Christopher Frank Kalata, RBC Capital Markets, Research Division - Assistant VP [14]

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My first question is just on what you guys are seeing on the ground in your markets? We have been seeing conditions improve (inaudible). And then secondly, just going back to Valencia. Is there any chance you could see those deliveries delayed at all for you guys to capitalize on potentially an improved pricing environment?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [15]

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I'm sorry. We were breaking in and I heard a little bit of the question. I thought the first part of the question was a question about our markets and the performance of the market that was in the first part of this.

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Christopher Frank Kalata, RBC Capital Markets, Research Division - Assistant VP [16]

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Yes. (inaudible) the markets that are -- what are you seeing in your specific markets? And if there's any chance we could see delays in Valencia at all to capitalize on potentially an improving price environment.

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [17]

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No, we -- first of all, our markets are still performing very well. These are markets that are very unique in terms of lack of supply and high demand and job creation. We go from a ratio of job jobs created to permits anywhere from 3.5 to 6 jobs to a permit. So obviously, there's a huge imbalance. And that has been going on for long time, and therefore, there's a big pent-up demand. So our markets are still performing very well. What we do with our -- with the velocity of our supply is that we look at in optimizing the absorption rate. You don't want to go too fast, and therefore, you're basically not pricing right, and you don't want to go too slow because that means that you're actually not optimizing return. So we try to get to somewhere around in our markets, somewhere that touches about the 3 per month per product. 3 home sales. And when we sell their home, site store builders, we monitor on a weekly basis, each of the product's absorption and start gauging when we bring the new replacement of product online to [dock] it with that. So we don't have a lot of overlap, and therefore, start disrupting the pricing structure. So we spend a lot of time on making sure that we are monitoring in real-time and timing to the next product offering at the right time. So it's not a random acceleration or deceleration. Believe it or not, there's a lot of science behind it.

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Christopher Frank Kalata, RBC Capital Markets, Research Division - Assistant VP [18]

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Got it. Understood, very helpful. And then just for my second question. I didn't see anything in the press release, but could you just provide an update on the City of Hope partnership and how that's been progressing?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [19]

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The partnership. Oh, City of Hope partnership. I'm sorry. The -- it's going really great. And if you were to talk to them, they'll tell you that where we started and where we are today has been extremely exciting. They are officed with us over here. We started with a small transaction that now has expanded to a bigger transaction. And I think you should expect as we go forward. They're going to be a big part of our world. Health care is extremely important, in my opinion, in community building and cancer, I know, is on everybody's mind, and we're fortunate enough to partner with the best Cancer Center on the west and people who are like-minded in terms of community involvement. So it's going great. The transaction itself that we talked about. As I said before, we are hoping that it will be approved by the city, the conversion to medical within the coming short period. And therefore, they can start their tenant improvements and be on target to open their facility by the early part of 2021. And as a result of their presence, now we have had a lot of discussions with other health care providers who want to be in their universe, (inaudible) companies that are associated with them that want to be part of that. So that relationship has been a really wonderful relationship.

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Operator [20]

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And next, we'll go to Sam McGovern with Crédit Suisse.

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Samuel Thomas McGovern, Crédit Suisse AG, Research Division - Research Analyst [21]

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In your press release, you guys talked about a strong 2020. Is that more broad-based? Is it visibility for certain projects? And when you think about sort of the interest level from builders are -- what's the level of engagement? Are there currently letters of intent in process? Or where are we at that stage.

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [22]

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Okay. So I mean, yes, there is right now a lot of back and forth, I would call it, between us and the builders so far that have been selected for the first round of Valencia, and I can't speak more about that until it's a little bit more inked. But let me go back to -- I think the first part of your question as to the statement about 2020. We have been very upfront about the fact that the timing of our going public was premature from an operation point of view. And we had a lot of factors that had us go for the public offerings. We -- I've often said that I believe that going to the market in 2020, would give the market an ability to understand the company more to see more visibility in terms of revenue. The biggest assets of the company is Valencia and Valencia has been tied up in litigation for 15 years, and therefore, a lot of people were basically discounting totally the fact that Valencia will ever happen. When I went on the road show, a lot of people were questioning if it will ever happen because they heard over and over that, that it will happen.

Today, we can say it's happening. Today, you can go see it today. Today, you're going to have homes occupied next year. We're going to start talking about building commercial over there. So for us, that's a major step forward to be able to say, we now have the largest community in L.A. County, providing residential opportunities in a market that has virtually no supply, and it's the largest market in California. So that's a major thing for us. It's also, unfortunately, up to now because the only provider of revenue is being the Great Park, and it's an unconsolidated venture. It has confused a lot of our financial reporting because it doesn't show up in the top line. And I think Valencia now is going to start enabling people to see that this is a company that actually generates a lot of revenue. Unfortunately, not all of it shows up on the revenue line, and therefore, it skews up a lot of the numbers. The other thing is a lot of questions we have been asked about liquidity of this company. And whether we're going to come back to the market and ask for more capital. And today, we are saying that we are in a great position from a liquidity point of view. And we expect sort of the market shifting on us, that we will be a positive cash flow company going forward. That's a major statement for a land company. With a 25% debt to cap, and that is one of the best balance sheets, I think, in the industry. We have the commercial opportunities now that have matured enough, and we're going to start recognizing revenue out of those, that becomes more consistent revenue on a quarterly basis, which I know is something that the market always looks for from a land company. So we have a lot of things that are all converging in 2020 that are going to enable us to start talking to you all about the real value of this company and not have the frustration of people trying to read them between the lines.

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Samuel Thomas McGovern, Crédit Suisse AG, Research Division - Research Analyst [23]

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That's incredibly helpful. And I think you sort of foreshadowed my next question, which was actually about the cash flow and sort of the source and uses going forward? Obviously, you did tap the debt market this summer. But with the healthcare campus going vertical and the other commercial opportunities around term. How should we think about the sources and uses over the next year or 2 and how do we think about the cash flows? Is it all going to be generated from cash flow? Or are there other sources and uses that you're going to have to sort of be out there and looking at.

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

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Well, look, I think we've been very consistent about the fact that we are fully funded for land development, and I've been saying that for a while. And I think the numbers now show you that. We also were very clear last quarter when we raised $125 million. But this wasn't because we were not telling the truth about our fully funded position, but really more to provide ourselves with the capital to start capitalizing on our commercial opportunities. I think as we sit today, we believe that we are in great shape from a self-generating cash flow point of view to capitalize on all the opportunities ahead of us. Now something comes up, that is a great opportunity that we want to consider and take to our board. And as a result, want to go and raise capital for it. That's something that I don't want to say we're going to absolutely not consider. But as I look at the business and I have enough visibility today ahead of me for at least three years, short of the market conditions changing, I am very confident to say that we are well positioned to use our own cash and cash generation to capitalize and everything we want to do.

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Samuel Thomas McGovern, Crédit Suisse AG, Research Division - Research Analyst [25]

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Okay, got it. And then just last question. With regards to the commercial assets. When do you think that, that sort of achieves a sort of more stabilized, consistent level of NOI.

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

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Well, I mean, look, we -- it's -- when you say stabilized NOI, I think that, this -- our NOI will be a growing NOI as we go forward and start building, just to refresh everybody's memory. I mean, we have 23 million square feet of commercial opportunities that we can build over the years. Today, Five Point Gateway is about 1 million square feet. And as I said, we have several million square feet that we can build over the coming 3 to 5 years and start growing that NOI significantly. From a stabilization point of view, because of the nature of how we're doing these deals, we basically have a tenant that is already built in. The issue of the fitness facility is a good example. We already have a tenant. We already know that once the building is done, we have a stabilized situation with the tenant. So we're not building anything stack here, and we're fortunate enough to have a lot of people want to now be part of our communities. And therefore, if your question is about stabilization from a -- the traditional sense. In many ways, we're stable at the minute, we actually finished the buildings. And if your question in terms of stabilization of the dollar amount of the NOI, I think you should expect that, that NOI will be a growing NOI over the several years ahead of us.

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Operator [27]

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(Operator Instructions) Next we'll go to Michael, Rehaut with JP Morgan.

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Elad Elie Hillman, JP Morgan Chase & Co, Research Division - Analyst [28]

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This is Elad on for Mike. The first question, I just wanted to understand the levels of interest you're seeing from public versus private builders? And if you're seeing a change in mix and interest in the private versus public?

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

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Well, look, I think that the landscape, obviously, over the last, I'm going to say, 2 decades even in our markets have shifted a lot from the private to the public. Back in the late '90s, there were 1 or 2 publics in our markets, and most of them were privates. Today, I would say, you have probably 1 or 2 private, most of them are public. So I think because of the makeup of the market itself, we're definitely seeing more interest from the publics. The pricing of our land is such that not many privates have the balance sheet and the capacity to buy land and build with our communities. We always like to have 1 or 2 privates, building our communities just because I think that mix helps a lot. But I would say, definitely, we're seeing more interest from the publics.

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Elad Elie Hillman, JP Morgan Chase & Co, Research Division - Analyst [30]

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Okay, that's helpful. And just following up there on the land prices. So given the fact that there's been a pretty strong deceleration in home price appreciation this year in California and especially in San Francisco, where home prices are even turning negative. How should we be thinking about the relationship between the home and land prices in California? And how could that impact your business? How could the impact the land prices? What actions could you take to mitigate those impacts? And would that then maybe lead the way from a more privates to get involved?

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

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Look, we're not selling Five Point is not selling homes in San Francisco. So we're not exposed to any of the issues in San Francisco from a residential point of view. As it relates to the market that we have been selling here -- or our builders have been selling. The ratio has been a consistent ratio of around -- between 50% and 54% of the price of a home is actually a finished home site value. In the LA market, we expect it to be more in the -- probably 35%, 36%. Somewhere in that range, that's typical. And as I said, we -- we're still seeing home price appreciation, which translates to land translation because of the residual nature of the pricing.

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Operator [32]

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And next we'll go to Paul Przybylski with Wells Fargo.

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Paul Allen Przybylski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [33]

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I guess, first question. How many lots do you have left at cadence or the builders have left at cadence in Novel Park and have their absorptions been meeting your 3 per month target? Or is there any potential that, that could be slowing from the second half of last year or earlier this year impact 2020? [Anything] for you all?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [34]

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Well, we're seeing, as I said, we're still seeing consistent seasonal absorption. As you know, we still have a little bit of fluctuation on the seasonal side. So we're pretty much consistent with where we are, and we were expected to be. In terms of how many -- I'm just looking up to see how many home sites are still remaining. We have 384 homes remaining to be absorbed. And that's about a 1/3 of what that cadence is. And by the time we have the opening of our next neighborhood, which will be sometime in the middle of next year, and this will be almost built out and sold, and we will dovetail into the new committee.

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Paul Allen Przybylski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [35]

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Okay. And then could you update us on, I guess, the runway, the Irvine Ranch has left with respect to their home or a lot of availability and how much -- how long you think that might take them to sell-through and then as take a hazard of a guess on what that might do for demand at the Great Park, either with respect to volume or pricing?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [36]

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Sure. So what we have been seeing and what we are projecting. And obviously, we don't know exactly what's happening in the Irvine Company. So we -- our market research right now shows that we are starting to get a bigger market share, not because we're performing better, but because they're running out of for-sale residential. And as you know, the Irvine Company has shifted a lot to apartments in the last few years. So based on our numbers right now, we expect that as of next year and beyond. We will be the bigger market share in the market. And I think that based on our projections right now, it looks like we're going to be -- the majority of the market within the coming couple of years.

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Operator [37]

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And next, we'll go to John Moran with Robotti & Company.

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John Moran, [38]

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Just a couple of questions on Newhall. The first being, so you're going to -- the fourth quarter will tell us something about, I guess, land values for the first lot sold. But can you -- do you feel like that it will be revealing in terms of the value creation opportunity there? Or is the -- because I recall, it's 4,000 units that you're doing the infrastructure work on, and you're starting with 500 units or maybe it's a 1,000 units in the next year or something? Will that be -- will reported results be cloudy? Or...

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [39]

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Not, these. No, the reported results will be, I think, very clear and will be very revealing. And we have -- we're anxious to get those deals done and be able to give more visibility to the value of Valencia. Yes, you're right. The first village is 4,000 home sites, and that's what we're working on, on infrastructure. We have the first, call it, 700 or so developed, and we keep on developing now going forward. And obviously, we keep on monitoring market demand. So we're not too far ahead in our infrastructure. But I think when we report, you're going to be able to see the margins over there. You're going to be able to see the pricing over there. And it's -- hopefully, it's going to enable you and others to extrapolate from that, the real value that we have in that one asset alone.

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John Moran, [40]

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And second, related to a Newhall. How soon might we see the first commercial deal there? And does the commercial there -- is there enough adjacency to what's already in Valencia to market outside of what you're building there now?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [41]

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Yes. I mean, first of all, the new Valencia, which is to be called Newhall is a brand-new city, basically across the freeway. And if you have seen what we've done at the Great Park, there'll be a lot of similarity over there in terms of what we're going to do and the lifestyle over there and all of the Commercial that we not only look at as a standard loan investment, but also as a major amenity to create value for our homeowners. We are going to be hugging the Six Flags Magic Mountain, which brings about 4 million people a year over there, and we're going to be able to capitalize on that traffic for food and beverage, hospitality and by creating an expanded entertainment and an area for experience. We believe that, that traffic will be very helpful in terms of validating a lot of our commercial.

In terms of our timing, I would say that our biggest focus, obviously, has been our residential opportunities. And once we know that we are in motion over there and go forward, 2020 will be a year where we'll start planning and thinking and finalizing our thoughts on the commercial side, and hopefully, we'll be able to start talking more about that as the year 2020 unfolds.

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John Moran, [42]

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Okay. Last one is just at Gateway. You announced this deal with City of Hope, and I'm just wondering when that might close? And I mean, given you bought that property I don't know, 2 years ago, it would be interesting to know what those numbers look like relative to what you paid? And can you say whether or not that was significantly profitable? Or how we might measure it? I know that you're putting land in for the 75,000 square foot facility.

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [43]

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Yes. So in terms of timing, we're expecting it to close in the first quarter of 2020. In terms of profitability, I hate to draw a definition on what significant means to you versus us. But I can tell you, we're very happy with the transaction, and it's one that I think is going to excite the market.

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John Moran, [44]

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But profitable?

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

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Yes, it's profile.

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John Moran, [46]

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I mean, in other words, it's not a deal just made to get them in there. It was ...

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

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Well, it's a profitable section. It's a profitable transaction, but more importantly, we're very excited that they're here. But it is a profitable transaction.

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John Moran, [48]

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Okay. And then related to that, there's -- I think there's still -- at last quarter, at the end of the quarter, there was $170-odd million in the Great Park joint Venture. Can you say anything about what -- what's going to be cover that cash? Whether it be distribution? Or is that for vertical development? Or any color around that? That's all.

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

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Sure. Well, look, the Great Park is self-funding and has a lot of excess cash. I think we should expect some distributions on top of the reserve we have in the venture for future development. So I think that's one asset that, hopefully, as we start seeing more, you start seeing more, the financial performance of that deal, you'll be able to start seeing what's going to happen in Valencia as well. But I think you should expect that there will be both distribution as well as a lot of cash on the balance sheet that we keep for opportunities to develop going forward.

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John Moran, [50]

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So is it possible that we'll generate cash for Five Point in 2020 or first half of 2020, second half?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [51]

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Well, we're expecting distributions in 2 pipelines, meaning we expect the priority distribution to burn off, and we start seeing distribution to Five Point in 2020. I don't want to commit to whether it's the first half or the second half of the year just because I have partners with us, who will have a say about the timing of the distributions.

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Operator [52]

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And next, we'll go to Nate Redleaf with Luxor.

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Nathaniel Redleaf, [53]

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Just -- as it relates to the first phase of the San Francisco project. Do you guys have final, final approvals from the city to the point where you can start to come out of the ground on stuff? Or are there additional approvals you need from the city? And then, I guess, related to that, how much site work do you need to do there before you can either start delivering residential lots or come out of the ground with a commercial structure.

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [54]

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Nate, so the answer is, yes, we have final approval, the way we define approvals because for us, it's a discretionary approval of the city that then turns into more of engineering and more things that have less risk to them. The most important thing in our business is to get the discretionary approval by cities and counties. And the answer to that question is yes, we received that approval. The 2020 will be a year where we will be working on reengineering and working on a lot of the technical side to start rethinking about that site, not as a regional outlet mall.

But more as the mixed-use development that we got approval. So expect that 2020 will be more going forward with engineering and things like that. And as I said on the last call, this is a deal that we fully expect to do with a partner. At least one partner. And we've had a lot of inquiries that we have not responded, we did not want to respond to until the approvals. And I can share with you that since we got the approval last week, we're having discussions with people who have expressed an interest in that phase. And hopefully, in 2020, we'll be able to be talking more about that. But in terms of timing of when we start going vertical, I don't think that you should expect us to go vertical before sometime in 2021, and probably later part of 2021.

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Operator [55]

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And this concludes today's question-and-answer session. We thank you for your time and interest on behalf of Five Point. That does conclude today's conference. You may now disconnect.

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [56]

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Thank you, everyone.