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Edited Transcript of FPH.N earnings conference call or presentation 8-Aug-19 9:00pm GMT

Q2 2019 Five Point Holdings LLC Earnings Call

ALISO VIEJO Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Five Point Holdings LLC earnings conference call or presentation Thursday, August 8, 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

* Michael Benjamin Eisen

RBC Capital Markets, LLC, Research Division - Senior Associate

* 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 Second Quarter 2019 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 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 obligations to update any forward-looking statements.

I'd now like to turn the call over to Mr. Bob Wetenhall, EVP 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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Thanks, Manish. Good afternoon, and thank you so much for taking the time to join us. I'm joined today by 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. Afterwards, Erik will review quarterly financial performance.

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

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Thanks, Bob, and good afternoon, and thank you all for joining us.

Now over the past few months, we have received feedback from several investors that our comments on the earnings call do not do justice to the strategy of the company and the level of execution that can be seen when touring our communities. As such, we decided to take a slightly different approach to my part of the presentation.

One, let me start with the operational update. Since the end of 2017, we have been consistently reporting that we will have our first deliveries of homesites at Valencia in the fourth quarter of this year. This statement might sound like a broken record. But the fact of the matter is that we have developed more than 800 acres and moved over 40,000 -- 43 million cubic yards of soil in one of the rainiest seasons in years, and here we are in Q3 of 2019, and we are still anticipating deliveries in the fourth quarter.

As an investor, we hope the consistency of the message is reassuring. As the industry finds itself challenged by labor and material shortages resulting in cost increases and schedule delays, our size in the market has afforded us the ability to create strategic relationships with the trades, aligning our interest and providing us with protections against these challenges.

At the Great Park in Irvine, we continue to receive positive feedback from our builders regarding the high-quality of sports and entertainment amenities. Strategically, we are very excited about our relationship with the City of Hope, which was just recently ranked as the leading cancer hospital in the U.S., according to U.S. News and World Report.

What started as a proposal to build a 73,000 square foot cancer center has evolved into an announcement made by the City of Hope to make a $1 billion investment to build and operate a comprehensive cancer center at the Five Point Gateway Campus, which will include a specialized micro hospital and research center.

Once the leadership of the City of Hope understood our vision for the communities of the future and we understood their vision of the importance of incorporating health care delivery into communities, the City of Hope committed to the larger relationship with Five Point at the Great Park. This new relationship not only validates our vision by a brand that is considered best of breed, but acts as a nucleus for an expanded health care campus that is envisioned to include other health care providers and services. These are just 2 examples of how our management team keeps one eye on mitigating downside risks and another eye on creating new growth opportunities within our communities.

Now let me turn it over to Erik to discuss our quarterly financial performance.

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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 second quarter reflects our continued investment in horizontal development at Valencia and the collection of management fees.

Additionally, the Great Park Venture closed on 60 homesites, representing the second takedown of the land sale that was announced in the first quarter. Subsequent to quarter end, the company closed on a $125 million add-on to its 2025 Senior Notes.

I'll start today with our consolidated results, then I'll address each of our 4 segments, and I'll conclude with some comments about our balance sheet and liquidity position. The company's consolidated revenues for the second quarter totaled $12.4 million and primarily reflect recognition of revenues generated from management services.

Selling, general and administrative expenses were $26 million for the quarter. Equity in loss from our 2 unconsolidated entities was $2.7 million for the quarter. We recognized $1.5 million in loss due to our proportionate share of the Great Park Venture's net loss of $5.5 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 $1.6 million loss was approximately $1.2 million for the quarter. Net loss for the quarter was $22.6 million, of which $12.1 million was allocated to the noncontrolling interests, leaving $10.5 million attributable to the company.

Now moving to the segment results. The Valencia segment is consolidated for accounting purposes. Significant expenditures on land development continued in the second quarter as we prepare the first phase of the community for land sales to homebuilders later this year.

Revenues for the Valencia segment were $820,000, primarily related to agriculture and energy operations. Selling, general and administrative expenses totaled $3.9 million for the quarter. The Valencia segment loss for the quarter was $4.3 million.

Moving on to San Francisco. The San Francisco segment is also consolidated for accounting purposes. Revenues for the San Francisco segment were $972,000 and were primarily related to management services and marketing fees recognized from prior period land sales. Selling, general and administrative expenses were $5.2 million for the quarter. The segment's net loss for the quarter was $4.5 million.

The Great Park segment includes operations of the Great Park Venture, which is 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 of 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 $43.9 million in the second quarter, of which $33.5 million was related to the Great Park Venture. The Great Park Venture closed 60 homesites during the quarter. Initial gross proceeds from the sale were $30.3 million, representing the base purchase price.

In addition to the base purchase price, the Great Park Venture recognized approximately $700,000 in estimated variable consideration from marketing fees it expects to be entitled to receive. The gross margin for this land sale for the partnership was approximately 31.9%.

Net loss for the Great Park segment totaled $2.3 million for the quarter, comprised of approximately $3.2 million of income related to the management company for services it provides to the Great Park Venture, offset by a $5.5 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 reporting, we include the full results of the Gateway Commercial Venture at the venture's historical basis of accounting.

Commercial segment revenues were $8.9 million for the quarter. Operating expenses, interest, depreciation and amortization totaled $10.3 million. The Commercial segment loss for the quarter was $1.4 million, comprised of $160,000 in management fees, offset by the $1.6 million loss for the Commercial Gateway Venture operations.

I'll wrap it up with a few comments related to our balance sheet and liquidity position. As of June 30, total liquidity was approximately $417 million, which was comprised of cash and cash equivalents totaling $293 million and borrowing capacity under our revolver of $124 million.

During the second quarter, we amended the terms of our revolving credit facility to extend the maturity date to April 2022 and to provide for an accordion feature that would allow an increase in capacity of up to an additional $50 million, subject to certain conditions, including receipt of commitments.

Total capital was $1.9 billion, reflecting $2.9 billion in assets and $1 billion in liabilities and redeemable noncontrolling interests. Our debt to capitalization ratio was 21% at the end of the quarter.

In July, the company closed on a $125 million add-on to our 2025 Senior Notes, increasing our liquidity. On an adjusted basis, as of June 30, the additional debt would have increased our liquidity to approximately $540 million and our debt to capitalization ratio from 21% to 24.9%. We're well positioned to continue investing in our communities and have enough capital to implement our plan of being able to deliver our first homesites at Valencia later this year.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take our first question from Mike Eisen of RBC Capital Markets.

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Michael Benjamin Eisen, RBC Capital Markets, LLC, Research Division - Senior Associate [2]

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Just wanted to start out on the City of Hope deal you guys announced. Can you help provide any sort of commentary around, are they going to take some of the office space in the building that you currently have? What kind of a development plan is there? When should we start to anticipate additional financial benefits of the partnership coming into the model?

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

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Mike, this is Emile. So we're going to be careful about what we can say and not say because we are still at the stage of finalizing everything with them. But basically, they're going to be buying a building that is the vacant building in our campus, which is about 191,000 square feet. And we are working together with them to help them build the micro hospital next to it. And that will, from our perspective, expand our vision for the health care campus that we always contemplated going in that area.

So this is very exciting for us because, as I said in my opening remarks, it really validates the vision we have and creates an alignment with a brand that, I think, is going to attract a lot of other health care providers.

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Michael Benjamin Eisen, RBC Capital Markets, LLC, Research Division - Senior Associate [4]

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Got it. That's really helpful. And then, I guess, just a clarifying point on them moving in and taking up some of the office space in the building. Is that something that we should anticipate a move in within the next 12 months? Or is this going to be a drawn out process in conjunction with building the other facility?

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

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So we're working right now with them and the city to assist them in completing the tenant improvements to equip the building for their needs. And I think that their CEO had announced that they are targeting sometime in the first part of 2021 for opening.

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Michael Benjamin Eisen, RBC Capital Markets, LLC, Research Division - Senior Associate [6]

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Awesome, very helpful. And then one last one for me. Thinking of the progress you guys are making in San Francisco, splitting the 2 parcels apart, in Candlestick, you talked about Phase 1 in the past and some of the different development actions you're taking there and that you could potentially see someone come in to open a campus-like facility.

Is there anything that you can provide on progress of development there and developments talking to partners in that development process?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [7]

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Sure. Well, first of all, I think we are still on track, as we have reported before, to have the approval by the city by the end of this year of the first phase, which, as a reminder, it is about 1,600 homes, 750,000 square feet of office and about 280,000 square feet of lifestyle retail that's complementary.

We really are not talking a lot to investors. We have had a lot of interest from people. But until we get the approval from the city and until we really have something packaged properly to have a discussion to potential users or investors about our partners, we have to be careful because this project has had a lot of noise around it, and I want to make sure that when we have this conversation, we have it with certainty of timing and everything else that's already packaged.

So we're just a few months away from that approval. And I think that, as of 2020, we will be in a much better position to have those discussions with those who have expressed interest.

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Operator [8]

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We have our next question from Alan Ratner of Zelman & Associates.

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Alan S. Ratner, Zelman & Associates LLC - MD [9]

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Emile, first just to clarify, I thought I heard you said that the City of Hope is buying a building from you guys. I just wanted to clarify that. Is that the case? And if so, does that just mean that there should be a cash inflow at some point whenever that transaction occurs? Or did I mishear that?

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

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Alan, yes, you heard me right. They will be buying a building and then building the hospital next to it. And this is a building that they're buying from the Five Point Gateway Venture, which we have 75% interest in. And there will be a cash influx. I'm not in a position to discuss the amount, but the answer is yes.

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Alan S. Ratner, Zelman & Associates LLC - MD [11]

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Okay. That's helpful. And then second, we're -- I guess, we're 3, 4 months away from what sounds like it's going to be the first round of lot sales at Valencia. So congrats on sticking to that time line. Obviously, it's been a challenging weather year. So, as you mentioned, it's certainly encouraging just to see that on track.

Could you give us any color -- just I would imagine you've been having conversations with builders about plans for the first phase? Any color you can give us in terms of how many lots you expect to sell? What type of product is going to come out of the gate initially? I'm not looking necessarily for a specific guidance, but any insight you can give us would be great.

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

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Sure. So the answer to the first part is, we've had a lot of discussions with builders. We've had some of the most senior executives from different builders who have toured the community, and the feedback has been really good. It's not surprising that the building community is very excited about Valencia because of the lack of supply in L.A. County, which has biggest population. So there's a lot of interest from builders.

In terms of the number of homesites, we've always said that we are going to be shooting for 500 or more. I think that I'm very comfortable saying it will be above that number. I can't tell you exactly what it is yet because we are going to be now talking to builders about the proper segmentation. We have the product developed. And I think that we are hoping that we can come out with something that's going to impress the market.

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Alan S. Ratner, Zelman & Associates LLC - MD [13]

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Great. That's helpful, Emile. And if I can sneak in one more just -- I know it's kind of happening in real time, but just with the -- all these headlines on trade war in China and obviously the reliance on that buyer in, specifically, Great Park, any color you can just provide on how sales trends have been there? I know you mentioned it's been steady, but any more recent color? Just has there been any impact whatsoever you've seen from all this noise of late?

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Emile K. Haddad, Five Point Holdings, LLC - Chairman, President & CEO [14]

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No. Honestly, we haven't seen it at all. I think that we have seen a great performance by the builders. We have been collecting profit participation even in the earlier phases of our communities that typically we see the profit participation from the builders.

If you recall, we participate with the builders in their homebuilding profit above an 8% margin. And we typically tend to see these type of participation come in, in the later phases. We are seeing them come in, in the first phases, which is very encouraging. That means the builders are raising -- increasing prices. And it means that the cost pressure on them is not as big probably in this market. I don't know what the reason is. But we haven't seen anything in terms of any of the noise of trade impact our business.

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Operator [15]

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(Operator Instructions) And we'll now take our next question from Stephen Kim of Evercore.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [16]

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Congratulations. I wanted to talk to you a little bit about the evolution of your vision for, I think you mentioned, the communities of tomorrow -- of the future. In particular, what I was curious about is if anything has changed in the last 3 months as you continually evolve your thinking around what kind of amenities and what kinds of features are going to be most impactful for separating your communities from the competition in the future. If anything has evolved there that's worth calling out, that it -- maybe was not as prominent in your thinking 3 months ago or 6 months ago, but is now starting to figure more heavily in your long-term designs?

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

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Stephen, thank you very much. Look, the answer is, we live in times when every day, there is an evolution in thinking. We are in a very disruptive period in history. And if you are not evolving your thinking in real-time, you're actually falling behind. So the answer is, yes, on the tactical side.

I mean, our strategy has always been, as you know, to try to prove up the community of the future by integrating the elements that we believe the generation that's going to be interested in being a part of these communities is interested in. So that's why we've focused a lot at first on recreation, on sports, on attracting big names and big brands to mega sports complexes that starts attracting really people to those places and, therefore, starts actually validating a lot of their uses that go around this, food, beverage, hospitality and the like.

And now we have proven that with a sports complex at the Great Park, that's 2.5x the size of Disneyland. The facility that was opened by the Ducks is the largest ice facility in the country. And today, we have US Water Polo building a facility over there. So the first piece was in place.

The second was entertainment. Our partnership with Live Nation with the 12,000 seat amphitheater has been an additive to that lifestyle. So now we're looking at food and beverage and hospitality. So the first thing we were looking at is how do you create a place where people want to be. And that's why a lot of people move into major urban markets. I think, as you heard us now talk, our focus right now is on wellness and health care. And we have found a partner who is now focusing on the same issues as we are. And I think the evolution probably in our thinking really falls in the area of health care delivery and proving up concepts of health care delivery that are now going to be part of the thinking of people going forward with technology disrupting health care.

So you're going to see us look at each of these pieces and put it in place in a way that is very well integrated with the other pieces.

But I think, at the end of the day, Stephen, here's what I think we're trying to do. We're trying to provide a place where if you are the CEO of a company of the new economy, and I don't want to call it tech companies, that is looking for building a campus somewhere, we can actually allow you to check the boxes, all of the boxes you need to attract talent whereas other places they can't. To give you an example, if you build an office, today, campus in San Francisco, you still have the challenges of housing, recreation, public education, et cetera.

If you want to be a part of our communities, we can check the boxes for you on all of that, all the way from housing, recreation to public education. So what we're trying to do is really create communities that become the hubs of the new economy going forward. And I hope that helps because thanks for the question, that helps me at least explain what we spend a lot of our time thinking about here.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [18]

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That's very helpful. I appreciate that. I guess, looking at it from a slightly more near-term perspective and in particular, I'm thinking about the builders and their appetite for your lots. I was curious as to whether you've noticed any changes in their appetite. I think Alan was asking you kind of about what sorts of designs they might be thinking about today.

I'm kind of curious about how you may have seen an evolution in that. And in particular, I was wondering about whether or not single-family build-to-rent has begun to surface as a more discussed option for you in your communities.

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

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Well, no, the answer is -- on the last part is no. We haven't seen it on the single family, mainly because our markets is markets that you just start building single-family, you are starting to push the envelope of pricing, and therefore, the rent is going to become a little bit out of range.

What we have been working with the building -- builders on is always trying to deal with the issues of affordability. And therefore, if you see the evolution of the product that we build right now or the builders build in our community, we tend to go to a smaller type of product that has lifestyle around it, and therefore maintaining a cap on pricing so we don't start pushing the envelope on affordability. Our formula that we solve to in terms of what products we build tries to solve for pricing starting from 40% of the median home price in our market to 1.7x the median home price in our market.

That gives us a wide range of offering, it gives the builders an ability to pick the niches they are comfortable with and maintains the balance of affordability. That's really what we spend our time on. But no, we haven't seen anything on the single-family for rent in our markets yet, or I don't think we're going to see it.

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Operator [20]

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We'll take our next question from Michael Rehaut of JPMorgan.

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Elad Elie Hillman, JP Morgan Chase & Co, Research Division - Analyst [21]

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This is Elad on for Mike. Continuing on the theme of builder trends, several builders have talked about decreasing their exposure to California, given not only the current demand environment potentially, but, more so, I was hitting at builders moving towards increasing their option versus owned lots. And I was wondering how you think this trend could affect your business?

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

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Well, look, we're in -- in primary markets, California is a very large market. And when people talk about California, I think they tend to talk about it as if it's one market, but it's a lot of micro markets. So I can't comment on secondary or tertiary markets in California, but I can comment on the markets that we're in and we honestly dominate, and that's the costal markets in California.

We haven't seen anything from the builders that have indicated that they have less of an appetite. What we try to do actually is try to provide the builders in our markets as close of the model that they're looking for in terms of land as possible. We develop the land. We develop the land in sizes that are -- could be absorbed by a builder within 18 months or so on an average from the day they start. So these are not long-term commitments.

We take all the risk on the land on our side, meaning we develop the land, provide and develop, we build all the amenities upfront. Today, at the Great Park, we have a high school, [to] K-8s and a third one that's going to be built plus all the amenities. And we've developed the products in consultation with the builders, but we actually develop the products. So when you buy land from us you don't have the downtime of waiting until you design the product and get through the permitting, which basically is [some] cost. You don't have to pay a lot of capital upfront for land that you're going to take you a long time to absorb, and you don't have to worry about taking land development risk.

That's as close as we think we can get to being a quasi-partner with our builders in our markets. And we have done multiple takedowns with builders, where we can help them on the balance sheet of the equation. So I think that what we -- you would see us do going forward with our builders is to try to be as close as possible of a partner and help them in terms of not loading their balance sheet with land with different type of structures.

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Elad Elie Hillman, JP Morgan Chase & Co, Research Division - Analyst [23]

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Okay. That helps. All fair points. And then secondarily, I was also wondering if there was any -- sort of what the drivers are behind your recent add-on to the debt issuance, the $125 million? And any plans in the near-term for the use of the proceeds? Any particular development, future development that you have in mind?

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

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So thanks for the question. First of all, we have made statements previously, and we are still making the same statement that we are fully funded for our land development. So I don't want any confusion as to why we raised the money, whether that means that we are not consistent with previous statements. However, at the same time, we now have the opportunity of starting to look at our health care campus going vertical. We have -- some of our commercial opportunities are around the corner.

In Valencia, in the first phase, we have 1.6 million square feet of commercial that could be built. And we also have been very consistent from day 1 that the company's strategy is to redeploy capital into our commercial opportunities and own and operate either on a stand-alone or with operating partners as much as possible of our income producing and grow our net operating income.

That has been the consistent message. And what you're seeing today is we took advantage of the window opened to go and raise the $125 billion (sic) [$125 million] and put it on the balance sheet, so that will actually be available for our commercial opportunities as they become more mature. That's really the main driver behind the raise of the capital. And I think as we start going forward in '20 and '21, you're going to see that, that capital is going to go to work to start helping us build our NOI.

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Operator [25]

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Thank you, ladies and gentlemen. This concludes today's question-and-answer session. Also concludes the call. Thank you for your participation. You may now disconnect.