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 business, financial condition, operations, cash flows, strategy and prospects.

Forward-looking statements represent only Five Point’s estimate on the date of this conference call and are not intended to give any assurances 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 Watson Hall, EVP of Capital Markets. Please go ahead, sir..

Thanks, Manish. Good afternoon and thank you so much for taking the time to join us. I’m joined today with our CEO, Emile Hadad, 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..

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 just 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. 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 sounds like a broken record, but the fact of the matter is that we have developed more than 800 acres and moved over 43 million cubic yards of soil in one of the rainiest seasons in the 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 interests 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 U.S., according to U.S. News & 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 it $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 healthcare 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 breeds, but acts as a nucleus for an expanded healthcare campus that is in vision to include other healthcare providers and services.

These are just two 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..

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 take down of a landfill 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 four 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 service Selling, general and administrative expenses were $26 million for the quarter. Equity and loss from our two 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 Ventures’ net loss of $5.5 million for the quarter, after adjusting for the amortization and the accretion of the basic 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 non-controlling 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 at 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 managing 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 30th, 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 increasing 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 non-controlling interests. Our debt-to-capitalization ratio was 21% at the end of the quarter. In July, the company closed on $125 million add-on to our 2025 senior notes, increasing our liquidity.

On an adjusted basis as of June 30th, 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..

Thank you. [Operator Instructions] We’ll now take our first question from Mike Eisen of RBC Capital Markets. Please go ahead, sir..

Good afternoon. Thanks for taking the questions. Just wanted to start out on the City of Hope that 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, and when should we start to anticipate additional financial benefits of the partnership coming into the model?.

Hey, Mike, it’s Emile. So, we’re going to be careful about what we can say or 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 us. And that will, from our perspective, expand our vision for the healthcare 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 healthcare providers..

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 it going to a drawn-out process in conjunction with building the other facility?.

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

Awesome. Very helpful. And then one last from me. Thinking of the progress you guys are making in San Francisco, splitting the two 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 into open a campus-like facility.

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

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’s 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 I think 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 the 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 few months away from that approval. And I think that as of 2020, we would be in a much better position to have those discussions with those who have expressed interest..

Thank you. We have our next question from Alan Ratner of Zelman & Associates. Please go ahead..

Hey, guys. Good afternoon. Emile, first just to clarify, I thought I heard you said that the City of Hope is buying a building from you guys.

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?.

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

Okay. That’s helpful. Thank you for that. And then second, we’re three, four 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 timeline. Obviously, it’s been a challenging weather year. So as you mentioned, it’s certainly encouraging to see that on track.

Can you give us any color just, I would imagine you’d be 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 specific guidance, but any insight you can give us would be great..

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, some 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 LA County, which is the biggest population. So there is 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 interest the market..

Great. Now that’s helpful. And if I can sneak in one more just I know it’s kind of happening in real time, but just with 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 just noise a bit..

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 participated with the builders in their homebuilding profits, above an 8% margin. And we typically tend to see these types of participations come in the later phases. We are seeing them come in the first phases, which is very encouraging.

That means the builders are increasing prices and that 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..

Thank you. [Operator Instructions] And we’ll now take our next question from Stephen Kim of Evercore. Please go ahead..

Thanks very much, guys, and congratulations. Wanted to talk to you a little bit about the evolution of your vision for the, I think you’ve mentioned the communities of tomorrow, of the future.

In particular, what I was curious about is if anything has changed in the last three 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 was not as prominent in your thinking three months ago or six months ago, but is now starting to figure more heavily in your long-term designs..

Thank you very much. Look, the answer is we live in times when every day there is an evolution in thinking. We’re 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 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 interest to them.

So that’s why we’ve focused a lot at first on recreation, on sports, on attracting big names and big brands to major sports complexes that starts attracting really people to those places and therefore start actually validating a lot of their uses that go around the food, beverage, hospitality and the like.

And now we have proven that with a sports complex at the Great Park that’s two-and-a-half times 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 its 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 in. That’s why a lot of people moving to major urban markets.

I think as you heard us now talk, our focus right now is on wellness and healthcare.

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 is really falls in the area of healthcare delivery and proving up concepts of healthcare delivery that are now going to be part of the thinking of people going forward with technology disrupting healthcare.

So you are 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 is what I think we’re trying to do. We’re trying to provide a place where if you are the CEO of the company of the new economy.

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. I’ll 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 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..

That’s very helpful. I appreciate that. I kept looking at it from a slightly more near-term perspective, and in particular I’m thinking about the builders and their appetite for your lot. 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.

He 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 trends has begun to surface as a more discussed option for you in your community..

Well, no, the answer is, on the last part, no, we haven’t seen it on the single family, mainly because our market that if you start building single family, you’re 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 builders on is always trying to deal with issues of affordability.

And therefore, if you see the evolution of the products 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 sold 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 1.7 times the medium home price in our market.

That gives us a wide range of offering, gives the builders an ability to pick the niches they’re 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..

We’ll take our next question from [indiscernible] of JP Morgan. Please go ahead..

Hi. This is Elad on for Mike. Continuing on the theme of builder trend, 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 toward increasing their option versus own lots.

And I was wondering how you think this trend could affect your business?.

Well, look, we are 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 coastal markets in California. We haven’t seen any 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 very start, so these are not long-term commitment.

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 two K-8 and the third one that’s going to be built plus all the amenities.

And we develop the products in consultation with the builders, but we actually develop the products. 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 is 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 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 you would see us do going forward without 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..

Okay. Thanks. Thanks, Emile. It helps. All fair points. And then secondarily, I was also wondering if there was any sort of the driver, sort of 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..

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 raise 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 healthcare 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 one 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 a consistent methods.

And what you’re seeing today is we took advantage of a window open to go and raise the $125 billion 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..

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..