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Edited Transcript of FPH.N earnings conference call or presentation 13-Nov-18 10:00pm GMT

Q3 2018 Five Point Holdings LLC Earnings Call

ALISO VIEJO Dec 21, 2018 (Thomson StreetEvents) -- Edited Transcript of Five Point Holdings LLC earnings conference call or presentation Tuesday, November 13, 2018 at 10:00:00pm 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

* Kofi Bonner

Five Point Holdings, LLC - Co-COO

* Robert C. Wetenhall

Five Point Holdings, LLC - EVP of Capital Markets

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Conference Call Participants

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* Elad Elie Hillman

JP Morgan Chase & Co, 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

* Stephen Kim

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

* Thomas Patrick Maguire

Zelman & Associates LLC - Senior Associate

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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 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, strategies 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 occurred yet, 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 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 the conference over to Bob Wetenhall, EVP of Capital Markets. Please go ahead.

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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 market conditions in our communities as well as a recap of third quarter results. Erik will then discuss our third quarter financial performance and liquidity.

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

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Thanks, Bob. Good afternoon, and thank you for joining us.

The third quarter was yet another step in advancing our long-term strategy upon locking the value of our irreplaceable assets in 3 of the most dynamic markets in the country. We continued our land development activities at Newhall in Los Angeles County, where we are positioned to generate revenue in that community sometime toward the end of 2019. In San Francisco, we have continued building infrastructure at Candlestick Point, consistent with our prior comments that this would be our main area of focus during the next few years. In the Great Park Neighborhoods, where we have several builders selling homes, home buyer activity remains consistent with prior trends. We have also not changed our plans to deliver another 500 homesites by the end of the year.

Six years of consistent job growth in San Francisco, Los Angeles and Orange County, combined with limited new residential construction activity, have resulted in pent-up demand for housing in the primary markets in California, where we operate. We expect this dynamic to persist in the future.

The future supply of housing will most likely be constrained by the limited amount of land available for development in California's primary markets as well as the lengthy approval process required for obtaining entitlements. Several publications have highlighted a shift in national housing demand reportedly driven by an increase in interest rates and reduced affordability. As stated before, we have not seen a change in the trend in our markets. Nonetheless, we will continue to closely monitor homebuyer activity at the Great Park Neighborhood as well as the outlook for our other communities. If things change, we will update you on the next earnings call.

With that, now let me turn it over to Erik, and we will be happy to take your calls 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. As we've discussed on previous calls, our consolidated financial results for the next few quarters will reflect our continued investment in planning and development activities at Newhall and Candlestick as we prepare these communities for land sales. As a reminder, our Newhall and San Francisco communities are consolidated 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.

Revenues for the third quarter of 2018 totaled $13 million and were primarily generated from $11.2 million in management fees. The management fee revenue was offset by $6.7 million in management services expense for the quarter.

For our unconsolidated investments, which include our 37.5% investment in the Great Park Venture and our 75% investment in the Gateway Commercial Venture, we recognized a loss of $4 million, which was primarily due to our proportionate share of the Great Park Venture's loss of $10 million for the quarter. While there were no land sales for the Great Park Venture in the third quarter, significant progress has been made developing the next neighborhoods, where we expect land deliveries to occur by the end of the year.

Our corporate and divisional SG&A was $26 million for the quarter, while interest income was $3.1 million. As a result, the net loss for the quarter was $21.9 million.

Our third quarter operating results by segment are as follows. The Newhall segment recognized a loss of $3.2 million. The San Francisco segment recognized a loss of $4.5 million. The Great Park segment, which includes the operations of the Great Park Venture and the development management services provided by the management company, recognized a loss of $6.7 million. The Commercial segment, which includes the operations of the Gateway Commercial Venture as well as the management services provided by the management company, recognized a loss of $46,000 for the quarter.

Now let me address our strong liquidity and leverage position, which provides the company with significant financial and operational flexibility and enables us to accelerate or pull back on expenditures depending on market conditions. Our cash position at the end of the quarter was $595 million, which is an $84 million decrease and is primarily the result of inventory expenditures at Newhall and SG&A. We had no outstanding borrowings under our $125 million corporate revolver, which results in liquidity of $719 million. We expect land sales at Newhall to begin in late 2019. In the meantime, we expect to meet our cash requirements with available cash and collection of management fees under our various management agreements. Total booked capital at September 30 was $1.9 billion, and our debt to total capital ratio remained at approximately 24%.

Let me turn it back to the operator now, who'll 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 is from Scott Schrier with Citi.

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [2]

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First question. In the press release, you called out that you're seeing Great Park homebuyer activity is consistent year-on-year, which is definitely a little different than what we've been hearing from builders in general. So I'm curious if you can kind of elaborate on that, what you're seeing. Is it -- obviously, I was out there. I saw the attractiveness of the community. Is it that what you think is just keeping the demand there? Or there are changes from homebuyers in terms of price point perspective -- or from a price point perspective, I should say?

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

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Scott, look, I think as I said, we haven't seen a change in the trend at the Great Park. I think that from our perspective, it doesn't mean that it's immune. And by no means, I'm going to say that. But I can tell you that we haven't seen the change in trend, and I think that it could be attributed to a combination of things. One is we are in markets that have had a very big supply-demand deficiency, and it has been compounding over the years. So you have a dynamic over here that I think is driving a different market, strong job growth, no availability of product. And massive planned communities in general tend to perform better than subdivisions. And we are fortunate enough to be in a market where we share the market with the Irvine company and -- which has a track record of protecting the value in the market. And as you saw, we now are starting to get the benefit of the investment we've been making in the amenities at the Great Park. So I think that the combination of things has so far allowed us to see performance that's consistent with previous trends, and we have not seen a shift yet.

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [4]

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Great, Emile. Second question on Newhall. I think you mentioned late '19 for deliveries. I was just reading some reports on the potential damage for these buyers, and I'm thinking from a labor perspective. Have you taken that into consideration? And does that give incremental headwinds, whether it's for wages or anything from a labor perspective to keep Newhall on track?

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

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Sure. So let me differentiate between the labor of building homes and the labor of land development, which is really where we are focused. Our operation is basically locked and loaded in contracts that are long-term contracts with our grading contractors and our infrastructure. So we are not going to be exposed to any change in labor conditions. Our cost is protected accordingly because we get the benefit of the size, and therefore, we have protections in terms of the cost. So we are not going to be exposed to any shift in labor conditions as it relates to land development. I can't comment as to whether any of that might or might not have an impact on our guest builders in 2020 and beyond as they build, although I think that there's going to be a lot of work at Newhall that will attract a concentration of labor. But I don't want to comment on something that I am not actually involved in yet.

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Operator [6]

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Our next question is from Mike Eisen with RBC Capital Markets.

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Michael Benjamin Eisen, RBC Capital Markets, LLC, Research Division - Senior Associate [7]

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Just wanted to start following up on the Great Park commentary. It seems that demand is continuing to be strong, and you guys are on pace to make another land delivery before the year-end. And thinking of the broader context of the slowdown, we've seen some of the commentary from homebuilders about their land spend initiatives into '19 and slowing demand trends. Have you guys started having conservations into '19? And are you hearing anything different from your homebuilder customers than you would've heard maybe 6 to 9 months ago?

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

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Well, we have started discussions about '19. We also have started discussions obviously about end of '18. And I can tell you, Mike, that I think we're getting a little bit of a mixed message from the builders. Some builders are telling us that they will have more of an interest in things that might close early 2019 rather than year-end, and that might be driven by year-end issues. You have some builders who are a little bit more hesitant. But I can tell you, most of the builders that we have spoken to are very excited about Newhall and view that as a huge, now, benefit because there hasn't been any real supply, and therefore, a lot of them have not had an ability to have an operation in L.A. County and, we think, gives them a big book of business. So those discussions have been great. And I can tell you because we are talking about selling home sites at the Great Park by the end of the year, we obviously are in more advance discussions, and the feedback has been very positive.

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Michael Benjamin Eisen, RBC Capital Markets, LLC, Research Division - Senior Associate [9]

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Understood. That's helpful. And then transitioning gears up to San Francisco. I was hoping you could give some color around the development on the Candlestick side of things, where you are today and as you look over the next 12 to 18 months. And then if you have any developments around the shipyard side of the operation and what's going on with the Navy, that would be extremely helpful.

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

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Of course. I'm going to have Kofi, who is closer to the issues of the Navy, address the Navy. But -- the issues on Hunters Point. But as we stated before, our focus for the next several years is going to be on Candlestick, which is not subject to any of the testing or Navy activity. We are going forward with infrastructure, and that is ongoing as we speak. And we are working on refining the thought process around what goes in the area of Candlestick in terms of the plan that meets the demands of the future and not be building for something that might be obsolete. Those discussions are ongoing. Infrastructure is moving forward, and we expect that sometime by the next quarter or 2, that we'll be able to finalize our plans and start moving forward with execution on Candlestick, which will take place for the next probably 5 to 6 years. Now let me have Kofi address the issue of where is the testing with the Navy right now.

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Kofi Bonner, Five Point Holdings, LLC - Co-COO [11]

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Thanks, Emile. The Navy has had a series of public meetings in the community and has recently stated that their approved plan for retesting the shipyard will be released before the end of this year.

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

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So obviously, we're monitoring that. We're very interested in what's happening there. But it doesn't have an impact on our business plans.

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Operator [13]

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Our next question is from Michael Rehaut with JPMorgan.

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Elad Elie Hillman, JP Morgan Chase & Co, Research Division - Analyst [14]

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This is Elad on for Mike. I just had a couple of quick ones. So first, just backward -- going a little bit backward to last quarter. The additional 2 million square feet of commercial space was approved by the Board last quarter for San Francisco. Is that -- some of that limited to Candlestick versus shipyard? Or can you do it on either one?

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

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No. I think that it has some constraints as to where it goes. But we have a partnership with the city of San Francisco that has allowed us to have a lot of flexibility. And the city, obviously, is interested in seeing things go forward. So I would say that if we determine when we finish our plans that we need more of that square footage to go one where -- one place or another, we will be able to get that done.

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Elad Elie Hillman, JP Morgan Chase & Co, Research Division - Analyst [16]

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Okay. And if you had any update on the JV with Macerich and what the plans are around that.

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

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We're still talking to them. Nothing has changed from the last quarter, and we're still looking at what's the right plan for that area and what's -- how does this structure go -- look going forward.

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Operator [18]

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Our next question is from Stephen Kim with Evercore ISI.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [19]

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Couple of quick ones here. I guess, first of all, regarding shipyard, obviously, what's happened there has been pretty unfair. And I was curious as to whether or not you thought there was any opportunity to recover damages either through litigation or some other means, whether this is something that you've looked into or whether that's a viable alternative.

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [20]

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Obviously, we will not discuss any litigation strategies of ours publicly, so I'm going to not be able to answer that question. But I can tell you, we're working very closely on the constructive side of the equation. We're working very closely with the city and the Navy and the homeowners and every stakeholder over there.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [21]

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Yes. Makes sense. And then in Newhall, you -- obviously, you're still on track here for land sales at the end of the year -- in end of 2019, that is. And obviously, there's a lot of questions about the direction of the housing market and particularly in California. So I guess, obviously whenever -- in your business, long-term planning and scenario analysis, I would imagine, is a super important part of what you're doing. What I'm wondering is if you could give us a sense for how fully formed is the various alternative strategies may be. So you have a certain plan, which you've articulated in terms of the initial sales out of that project. Are there fully formed alternatives that you are sort of going to be able to shift to if market conditions you assess, let's say, 6 months from now are meaningfully different from what you see today?

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

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Yes. The answer is yes. And I think the difference between us and, for instance, a homebuilder is that we don't carry inventory per se. We just process raw material. And 2/3 of our expenditure on an annual basis for the next several years is variable cost, which means that we have an ability if we see a shift in the market, and we believe that putting money in the ground to generate revenue a few months later is not a viable strategy, we can within 30 days shut off the machine. And 2/3 of our expenditure for that year will turn into dry powder to other -- whatever the storm looks like. So that's the big advantages we have. And as Erik said, we are -- we have a very strong balance sheet. We have a lot of liquidity. And when you have 2/3 of your expenditure and you have an ability to control it and you don't -- you're not sitting on any inventory, I think that, that gives us a lot of control over a shift in strategy as a result of a change in market condition.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [23]

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No, that makes a lot of sense. Last question, if I could. The builder partners, who you have historically worked with, can you talk about the advantages or disadvantages in your eyes to working with a more limited selection of builder partners versus a broader array of partners? And if you are heading in a particular direction over the last year or so as you -- or rather as you go forward over the next year or so, if you're sort of looking to more narrow or maybe broaden your array of partners?

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

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Sure. So we've had now guest builders who have been repeat guest builders at the Great Park, which is really the only place so far that we've had activities with builders. And we typically will approach our guest builders who have been with us for a while first and see if they have an interest in continuing. And so far, almost every one of them has moved from one neighborhood to another. We are not running auctions anymore because we -- good news for us is, I think, we've put ourselves in a position to where we have a lot of relationships. There is a lot of demand. And we sit down with our builders, who as I said have been guest builders with us, and talk about -- and negotiate a deal. And that's our approach nowadays, and I think it'll be our approach going forward.

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Operator [25]

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Our next question is from Thomas Maguire with Zelman & Associates.

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Thomas Patrick Maguire, Zelman & Associates LLC - Senior Associate [26]

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One quick one. I just wanted to touch on some higher-level thoughts and maybe if you could just talk about the pipeline beyond the projects we haven't focused right now. I know you may not have specifics yet. But anything in the pipeline or thoughts on new opportunities moving forward and just maybe what we could do with dry powder at one point in time?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [27]

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Sure. Well, look, the good thing for us is that we have a big book of business already. We have a lot of land that we own that we've been working on for a long time, and it's now at a maturity level, where we can start getting value out of it. So our biggest focus is going to be maximizing the value of our own assets and then building our commercial portfolio, which is only going to go up in value as these communities build. So that's really our primary focus. Nonorganic growth is going to come from probably public-private partnerships and repurposing of space in our areas that we are very comfortable with. The Cal Poly deal that -- where we got selected to be the partner over there is a good example of that, and we are moving forward with the -- with that process. We have a couple of other opportunities that I'm not at liberty to talk about, but those could be other opportunities that would be similar in nature. That's what you're going to see from us. We don't need to make another deal. We have a lot of land, and we have an ability to generate a lot of revenue going forward out of our own assets. But if something comes across that is actually sitting within our own strategy and our strength, we will look at it.

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Operator [28]

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Our next question is from Paul Przybylski with Wells Fargo.

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Paul Allen Przybylski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [29]

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Emile, I guess, you mentioned that demand at Great Park had been pretty consistent of late. I was wondering if we could switch gears over the past quarter or so, what have demand and pricing trends been in the communities that are adjacent to Newhall? And then as your first sale comes closer, what does that competitor supply pipeline look like late next year? And any projects -- big projects they may have coming to market?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [30]

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So the first part of your question is what's been the trend in the neighborhood communities that are selling. Now there isn't really a large universe of communities over there that I can look at that will not have a, I think, 1 or 2 products or something like that they're building. So I really don't think that we have enough data to guide us. In terms of the L.A. market itself, we have now over the last 5 years generated 0.5 million jobs against 50,000 permits. Home price appreciation has been double digit in L.A. County. And more importantly, our discussions with the builders have really reinforced for us the fact that there's going to be a lot of demand for homesites and housing in our markets. But we don't really have competition per se. There's a couple of communities that I would not really look at as competition for us. That's the benefit we have. But at the same time, I don't have data to compare against.

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Paul Allen Przybylski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [31]

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Okay. And as you've been developing that project for a couple of quarters now, how do your development costs compare to budget? That's some pretty difficult topography. Have there been any surprises with respect to development?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [32]

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Not at all. We're right on target. Our contracts with the contractors have a protection in them. We have been developing in that market for a long time. And I can tell you there's one thing I never worry about when we're developing land unless we have surprises that we can think of like slides and things like that. But our cost has always been under control, and it's -- we are right on target.

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Operator [33]

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There are no further questions registered at this time. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a pleasant day.

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Robert C. Wetenhall, Five Point Holdings, LLC - EVP of Capital Markets [34]

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Thank you.