Five Point Holdings

Greetings, and welcome to the Five Point Holdings LLC fourth quarter 2020 conference call. Currently, all participants are in a listen-only mode. As a reminder, this call is being recorded. Today's conference may include forward-looking statements regarding five-point business, financial conditions, operations, cash flow, strategic prospects, forward-looking statements, represents only five-point estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because the forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risk and uncertainties. Many factors could affect future results and may cause five-point 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. And now I would like to turn over the call to Mr. Emile Haddad, Chairman and CEO of FivePoint. Please go ahead, sir.

Thank you, Sarah. Welcome to our call and happy St. Patrick's Day. A year ago yesterday, we had our year-end earnings call on the heels of sending everyone home to comply with the COVID stay-at-home orders and to ensure the well-being of our associates. Within just a few days, we set in motion our emergency plan that shut down discretionary spending, thereby preserving cash and protecting our balance sheets. At that time, our great park venture chose not to sell any home sites for the balance of 2020 in order to allow our builders to sell homes without the pressure of added inventory. This allowed us to continue to optimize the pace of our landfill and to maintain the value of our land which is a limited resource in our submarkets. The fact that we have approximately $180 million in cash on the Great Park Ventures balance sheet, in addition to the cash we have on the company's balance sheet, gave us the flexibility to make these type of practical decisions as we believed necessary. We did this all while helping our communities cope with the impact of the virus, including donating badly needed PPE that was in short supply in the early months of the pandemic. Today, as we look back at a very unusual year, we are proud that we accomplished all our goals for 2020. As stated in our earnings release, our balance sheet is well positioned with ample liquidity and low leverage. We believe that our assets have become more valuable as a result of the strength of the housing market and the migration of homebuyers to the types of communities that we are building, ones that include quality public schools, abundant open space, and state-of-the-art sports fields and amenities. At the same time, the bonds among our associates have grown stronger, and the commitment made by everyone to ensure that the company comes out stronger has been more effective than any team-building program that I have ever seen. Companies with a strong culture were able to function much better in a virtual environment than those without. As 2020 unfolded, it turned out that the bright spot in the economy was housing, driven by lower interest rates and what I have been referring to as a cocoon factor, where people find themselves spending more time in their homes. According to CoreLogic, in 2020, median prices of existing homes in LA County went up by 18.2% and 12.6% in Orange County. What we have seen so far in 2021 is a strengthening in the housing market in general and an increase in demand for homes in our community in particular, resulting in a bigger interest from builders to buy land. At the Great Park, comparing home sales and cancellations for the period of December 2019 through mid-March 2020 versus the same period in 2020 and 2021, the number of homes sold increased from 177 to 257, and the number of cancellations dropped from 41 to 10, yielding an almost doubling in the rate of net sales. We view the trend in lower cancellations as the leading indicator of homebuyers' confidence as well as their ability to qualify for mortgages. We are currently engaged with our guest builders regarding the next phase of home site sales, which we currently anticipate closing in Q2 or Q3. The anticipated proceeds from these sales are expected to be sufficient to pay the last $45 million of priority legacy distributions, which totals $476 million, and to provide for a distribution to typefarm. We also recently kicked off home sales at our pre-built program at the Great Park with the new home company. The program is off to a great start. On March 6th, the first eight homes were released for sale, and within a few days, five of these homes were sold and one more reserved at prices between $1.5 and $1.6 million. In Valencia, with the sale of the additional 487 home sites in Q4 to NBC, TriPoint, Toll Brothers, and KB, our builders are currently either building their first model homes or getting ready to do so very shortly. The first home sales in this first phase, which also includes our fifth builder, Lunar, are scheduled to start next month. In total, this first phase includes 1,268 homes. Later this year, prospective buyers will be able to visit approximately 50 separate model homes that will have a very wide range of pricing and will cater to a broad base of home buyers. Valencia will be the biggest provider of new homes in Los Angeles County by far. I have been in this business for 35 years and I've never seen a political environment that is more favorable focused on new housing. There are multiple pro-housing goals in the pipeline. and the governor has set a target of building 3.5 million new homes by 2025, which is approximately a 500% increase from the current annual pace of home production. This is all coming to pass due to the severe housing shortage in California that has been growing for many years, particularly in our markets where there is a high demand for housing and little supply of land for new homes. The state's most recent housing needs assessment has confirmed this fact and shows a need of over 1.3 million housing units in Southern California and over 400,000 units in the Bay Area. As part of the state's assessment, each county and city within these regions gets allocated a share of the housing needs, which it has been required to plan for in its zoning and general plan to meet the housing needs for everyone in the community. We are having active dialogues with our local public partners to explore opportunities for intensification within some of our communities to provide more housing and assist in mitigating the shortfall. We believe that the next few years will provide a good environment for housing. As the largest provider of diversified residential opportunities in main markets in California, we are positioned extremely well to capitalize on these conditions. Finally, with the vaccinations underway and the hope that by early summer, we will be able to start having in-person meetings, we are currently targeting June as a potential investors meeting that will be both virtual and in-person. Now, let me turn it over to Eric, who will report on our 2020 Q4 and year-end financials, and then we'll be happy to take questions after that.

Thanks, Emil. A summary of our financial results. was included in the earnings release issued yesterday, and our 10K was filed last week. Our financial results for the fourth quarter were highlighted by the previously announced second round of land sales in Valencia, where we closed on 442 home sites and entered into a contract to sell an additional 45, which will close in 2021. Our cash position improved by $27.6 million to $298 million and we had no borrowings under our $125 million corporate revolving line of credit. Debt to total capitalization at the end of the year was stable at 24.9%. Net debt to total capitalization at the end of the year, taking into account our cash balance, was 14.8%. Revenues under management were $115.6 million for the quarter, After eliminating revenues from the unconsolidated entities, our consolidated revenues were $111.7 million. The land sales in Valencia generated $105.5 million in revenue. Management fee revenue of $5.6 million was recognized during the quarter, primarily as a result of management services we provide to the Great Park Venture. ST&A for the quarter was $24.9 million. The company's share of fourth quarter loss in unconsolidated entities, which includes the Great Park Venture, the Gateway Commercial Venture, and the newly formed Valencia Land Bank Venture, was $3.1 million. Net income was $3.7 million for the quarter. The company has four reporting segments, Valencia, San Francisco, Great Park, and Commercial. The segment results for the fourth quarter are as follows. The Valencia segment is consolidated for accounting purposes. Total revenues for the Valencia segment were $106 million for the fourth quarter, which included the land sales as well as marketing key revenue we expect to collect as homes are sold. We closed on 442 home sites for $102.2 million. We entered into a sales contract for an additional 45 home sites, which were closed in 2021. 210 of the 442 home sites closed were sold to the newly formed Valencia Land Bank Venture, in which Five Point owns a 10% equity interest. The land bank was formed to facilitate land sales at Valencia to home builders who are pursuing balance sheet alternatives to land acquisition and just-in-time delivery of home sites. Revenues associated with these closings are reported as related party land sales and 10% of the gross margin from the land sale is deferred until the land bank sells the land to the third party home builder. The Valencia Land Bank Venture is an unconsolidated entity and its operations will be accounted for under the equity method of accounting. Five Point contributed $4.2 million to the land bank in the fourth quarter and $1.6 million of the gross margin from the sale to the land bank was deferred through equity and loss from unconsolidated entities. The Valencia segment profit was $27.5 million for the quarter. The San Francisco segment is consolidated for accounting purposes and recognized a loss of $3 million for the quarter, which was primarily related to ST&A for the segment. The Great Park segment includes operations of the Great Park Venture, the owner of the Great Park neighborhoods, as well as the management services provided by the management company to the Great Park Venture. As a reminder, we own 37.5% percentage interest of the Great Park Venture and 100% of the management company. The operations of the Great Park Venture are accounted for under the equity method of accounting, and therefore, the assets and the liabilities of the Great Park Venture are not included in our consolidated financial statements. The Great Park Venture is a self-funding operation with no debt and had a cash balance of approximately $128 million at the end of the year, which is not included in FivePoint's consolidated cash balance. Ownership interests in Great Park Venture are either percentage interests, of which FivePoint owns 37.5%, or legacy interests. Holders of the legacy interests are entitled to receive priority distributions of available cash in an amount of up to $565 million. To date, the legacy interests have received distributions of $431.3 million, including a $76.3 million legacy distribution, which was made in January of 2020. The remaining aggregate distributions payable to the holders of the legacy interests total $134 million. Of that $134 million, The first $45 million will be paid to the holders of the legacy interest prior to the commencement of distributions to the holders of the percentage interest. We anticipate the next round of land sales at the Great Park later this year to generate enough available cash to fund the $45 million priority distribution to the holders of the legacy interest and to commence distributions to the percentage interest, of which 5.0 will receive 37.5%. For the fourth quarter, the Great Park Segment revenues were $7.2 million, which were primarily related to $5.5 million in management fee revenue recognized by the management company for services provided to the Great Park Venture. Net income for the Great Park Segment was $0.4 million for the fourth quarter, which was comprised of approximately $1.6 million of income from the management company and a $1.2 million loss from the Great Park Venture operations. The company's equity and loss from the Great Park Venture after adjusting for a difference in investment basis was $1.3 million per quarter. Our commercial segment includes operations of the Gateway Commercial Venture and management services provided by the management company to the Gateway Commercial Venture. We own 75% of the Gateway Commercial Venture and 100% of the management company The operations of the commercial gateway venture are accounted for under the equity method of accounting, and therefore the assets and the liabilities of the gateway commercial venture are not included in our consolidated financial statements. Commercial segment revenues were $2.2 million for the quarter, which reflects a reduction in rent as a result of the sale of the two office buildings occupied by Broadcom earlier in the year. Commercial segment loss for the quarter was $0.1 million. The company's equity loss from the Gateway Commercial Venture was 0.2 million. With that, I'll turn it over to Sarah, our operator, for questions.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. And we'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Michael Rehat, J.P. Morgan.

Hi, this is Elad Hillman on for Mike. Thanks again for taking my questions, and congrats on the sales at Valencia. I wanted to delve in a little bit into the sales trends, again, at Great Park. appreciating some of the commentary you gave year on year. I guess I was more curious kind of sequentially how things have been shaking out for the builders so far, you know, this quarter and last quarter.

Well, what we're seeing at the great part is actually a really strengthening trend, starting from the beginning of the year in a very meaningful way. In the past, I used to reference that pre-COVID, we used to see about 9 to 10 home sales. And actually, in the period of March of last year, we were selling out of 22 communities. Today, we're selling out of 15 communities. And we're seeing a trend somewhere between 20 and 30, sometimes net. But the more important thing is we're really seeing very little cancellation. Last week, for instance, we had 20 net sales and zero cancellations. And that tells you that buyers do not want to walk away because home prices are going up and they know that builders will be able to sell their homes for higher. That also tells us that the buyers are being able to qualify. And the interesting thing that we've been watching in light of the movement in the treasury is that our buyers in the last phase recently had been 22% cash buyers and about 78% are using financing, and those are putting down 35% down payment. So, you know, that's important because as the market watches its potential uptake in mortgage rates, you know, we are not that vulnerable because our buyer is a different profile buyer. And, you know, I feel that it's important for us to highlight that because how mortgage rates might impact first-time buyers in certain markets is not necessarily how it's going to impact our buyers here. And as a result of the acceleration in sales by our builders, we now are talking to the builders and moving up potentially our land sale, the next phase at the Great Park. I'm hoping that we can actually conclude all of that sometime in the Q2, Q3. I can tell you that, you know, we went out with – usually we go out to our guest builders with – a request for them to tell us what their interest is, and then we start sorting through that. And as of yesterday afternoon, every product that we are offering had a suitor from the Billings community or more. So we're very, very encouraged by what we've seen with the Great Park, and I think you're going to see that the same trend is going to carry in Valencia as well.

That's really encouraging. Just to follow up on that, I believe you still have about 4,000 lots to be developed and sold at Great Park. Is there any sort of quantification or cadence of development and sales that you're expecting to do in Great Park for those home sites, you know, maybe 2Q, 3Q, and for the full year and over the next couple of years? Just had to think about the home sites. Yeah, yeah.

I think the question is, you know, what's the size of our offering? I think right now we're looking at potentially about 800, maybe it pushes 900 home site sales at the Great Park for the next round. Again, we pay close attention to the segmentation of the product to make sure that we don't have overlap that starts disrupting pricing structure. But right now I think we're looking at about 800 to 900. And, you know, as I said before, although we are at the number right now that is maxed at 10,500 in total. With the state movements right now towards allocating needs of housing to each of the cities and counties, we are trying to see how we can assist in that and potentially increase the number of home sites at the Great Park since we have the capacity from a land point of view to add more homes and we're hoping that that could be something that could benefit the public-private partnership we have with the city of Irvine.

Great. And then one in Valencia, if I could squeeze one more in. I was curious if you were seeing some changes in the builder land acquisition strategies, if there's any changes you're seeing in the underwriting criteria, and what was kind of the driver to create the Valencia land-based venture?

Well, I haven't seen anything in the underwriting that's changed. Obviously, the builders have developed a discipline in terms of their underwriting that I think has been consistent for many years, especially the ones that we partner with in our communities, the large publics. And I think that what I can tell you is that we're now getting a lot more interest from the builders about buying more land. I think the last report that John Burns issued There was a concern about the sentiment of the builders and the summary of all of the earning calls from the large builders. There's a consistent message about the need for more land by builders. As I said before, we've been waiting for this for a long time because we have been positioning the company to be in the path of that growth and we are the largest provider of land in primary markets in the state of california and it seems like the market is finally uh you know picking up in a big way so we're very excited and i think you're going to see a lot of good things happen over the coming two to three years in terms of uh builders remember what we try to do is we try to be a partner as much as possible with the builders builders today if you read what they're trying to do they're either buying land off-balance sheet and taking it on a rolling option. And that was the logic behind establishing our own land bank so we can provide that as a service for people who do not want to take the land on the balance sheet because our land is pretty expensive. And also, if you listen to all of the CEOs, they all are talking about getting land that is ready to go in terms of building homes and trying to stay away from land-heavy land development and tightening risk. So that's what we do. And we've been working at it now for many, many years to go through the entitlement process, to go through the land development, to build state-of-the-art schools and amenities so the builders can actually do what they want to do, which is simply build homes and sell homes and not have to make promises to their buyers about a potential amenity coming or a potential school coming. They can actually point to it as the buyers are looking at their homes. So we feel that the strategy we put in place many years is now starting to go up there very nicely with the strategy of all of the workers.

Great. That's very helpful. Thank you. Sure.

And next, we'll take the question from Alan Ratner, Zelman & Associates.

Hey, guys. Good afternoon. Congrats on all the progress here. First question, the Great Park land sale, and thank you, Eric, for the color on the distribution Any chance you can give us just a rough estimate, assuming you do kind of sell the 800 to 900 lots that you're expecting, what dollar amount that might come back to you in terms of the distribution?

Well, we have not disclosed it, but our sincere asking will tell you. We're expecting somewhere between the $120 to $150 million in distribution this year as a result of that, which, as you know, because you've been tracking this, is very meaningful.

Absolutely. That's great news. And thank you for that. Second question, I apologize if you've commented on this in the past and I just don't recall, but I'm curious if you've had any conversations with built rent operators in any of your communities. Obviously, that seems to be the new hot part of the market. All the public builders are getting into the space, or at least a lot of them are, and certainly the SFR operators are as well. And it would seem like that would be a great opportunity for you to accelerate some of the absorption of your your lots in the communities, given that it's a different product type, it's not competitive with the for-sale guys. So curious if you're going down that path, and if so, how does the underwriting differ for those buyers in terms of how they're thinking about the value of the land?

Well, we have not engaged any of the for-rent builders, but I can tell you that we are looking at it ourselves. And as part of our commercial segment, We expect to add apartments ultimately and potentially single family for rent as part of our portfolio. And the way it will work for us is with the land bank being established, we potentially could take the land in the land bank and then take it out from the land bank to build it and rent it. That's the process that we're going through as we speak. We are having these discussions with the board as we speak. And so what I think you should expect is that as the year unfolds and as we have more discussions with our board in terms of our strategy going forward, hopefully we'll be able to share with you more and more what we're thinking of in terms of the for rent program. Eric just slipped a paper in front of me. I guess he thought I was being a little bit too aggressive in the distribution. He said, please tell them it's $100 million. So Eric wants to tell you it's $100 million of distributions of iPhone.

I'll bring it down to 90, Eric, just to make you sleep better at night.

You've known him for a long time, huh?

Understood, guys. Good luck. Thanks again. Thank you.

Thank you. And next we'll take our question from Stephen Kemp, Evercore ISI.

Yeah, thanks a lot, guys. Let's see here. Mike, I wanted to touch on the comment you made about the political environment turning towards prioritization of increasing supply. I think you said you're having conversations about increasing density in some of your community's I guess the first question, just kind of big picture, I assume you meant Valencia and Great Park, but is there any potential opportunity for the timeline in San Francisco to accelerate? Or do you think the environmental concerns there effectively supersede the desire for housing supply? Is that kind of out of the conversation as a result for now?

Well, Steven, first of all, nice to hear from you, and I'm glad everything is well with you. Yes, thank you. So we contemplated whether we wanted to talk about San Francisco or not, and we really wanted my comment, at least, to be acutely focused on the residential, just because it's on everybody's mind right now, and everybody knows that the residential market is doing very well. And therefore, I did not want to dilute that strong message were discussions about commercial or San Francisco. So we contemplated the question and we're ready to answer it. So here's the answer. If you recall for the last two years since the Navy came out with their press release and started dealing with the issues in San Francisco, I used to say that unfortunately the political environment that existed before November and the friction that existed between the federal government and the state of California, and this is not a big secret, was not helping. We found ourselves stuck in that friction. What we've seen since the change of administration and since now that we've seen the amount of influence that the state of California has in Washington, D.C., we now have started seeing a lot of more movement. We've seen reports from the Navy about cleanup We have now in front of us a schedule that came out of the Navy that shows that they're ready to deliver the first parcel in 2023, which is a very sizable parcel, and roll through the rest of the parcel until 2026. The reason I didn't want to say it is because we're working right now extremely closely with representatives at the state level, at the federal level with the city of San Francisco, there are multiple conversations happening to try to make sure that these schedules and these commitments are firm. And that's why I didn't want to say anything. I was hoping that I can actually deliver that news in the next call when we have more confirmation. But I can tell you that I am feeling much, much better about where we are in San Francisco and the fact that things are going to move. So going back to the first part of your question, I think the opportunity of intensification, and I didn't want to say increase density because I don't want people to think what we're talking to our partners on the public side is going and building a bunch of very high-density products. At the great part, and you've seen here, we're probably right now at a density that is almost 50% of the density of what the airline company has built around us, So we have a lot of ability to intensify without going to mid-rise and high-rise and a lot of intensification. Not that we won't do it, but we have the capacity. In Valencia, as you know, we have a lot of land, and that's something that we will visit as we go. We're in the beginning of that. We still have 21,000 homes ahead of us, but we want to make sure that we're helpful in terms of any needs that the county has. San Francisco is a different story because San Francisco, if there's a willingness by the city To go to a higher density, a lot of the product that should be built underwater in San Francisco is more of a higher density, high-rise, mid-rise product, mixed-use, and therefore I think San Francisco has a lot of capacity to intensify. Those are really early discussions. All I wanted you to know is that the environment in California has shifted in a very, very meaningful way to a pro-housing. The problem is The process takes too long. There isn't much land in the primary markets, and that's why we find ourselves in a unique position talking to our public partners.

Well, that's great, Emil. I appreciate that. And don't worry, your secret's safe with me. I won't tell anybody.

I know that. I'll only read about it this afternoon. Yeah.

So that's very helpful. Second question relates to Great Parks specifically. You took an impairment on that last year when everything was, you know, all up in an uproar. And I remember that, you know, because of the JV nature, you know, that sort of precipitated that or compelled you to do that. Yeah. If you were to get some additional home sites permitted, I'm wondering if there's anything about that, you know, impairment that might influence the cost basis lower, or just if you could just talk about how you would anticipate the cost basis to be determined from, you know, these extra home sites, you know, that could conceivably be created.

If I say something that is inaccurate, Eric will jump in and correct, but let me just put it in perspective. The impairment we took was $30 million, and it's really a very, very small number when you compare it to the total budget and total revenue at the Great Park. So $30 million is not going to change the basis of the cost in any meaningful way to impact the margin. We did at that time is we took a very conservative approach when the pandemic started by making assumptions that were based on our view at that time of how the economy and how the market might move. And the main reason why the inferment took place is because we assumed that home prices are going to stay flat all through the year as builders were trying to sell, and that's why we didn't sell any more home sites. And we actually were told by our auditors that if we wanted, we could have avoided taking the infirmary and wait, but I did not want to not do it because I wanted to at least deal with it from an accounting point of view the way I was seeing the world at that moment. Looking back, obviously, the market behaved in a much better way, and if you were to reverse the clock, we probably wouldn't have taken the infirmary. Now, what's going to happen, though, is that additional home sites with home price appreciation moving up, that should expand the margin over time, but it will not reverse the importance.

Got it. Okay. That is helpful. Now, just a clarifying comment. You indicated that the density in Great Park, I think you said, was about half that of Irvine. I assume that's including all the land areas You know, that's not talking about the portions of the site that have been developed. You're talking about the entirety of the parcel, right? That's what you meant by the density is only 50%?

Yeah, what I'm doing is that, yes. I'm saying, look, if I take the number of homes that we have approval on, which is 10,500, divided by the buildable acres we have, and we compare it to everything that surrounds us, we would look at half of the density. Let me put it this way. If I were to take the density up by about, you know, 50% to 60% of what we have built so far, the density we've built, we probably can build another 7,000 homes. So we have a lot of capacity without starting to get into the area of very high density. And that's what we have been analyzing and looking at, and obviously the analysis is a very – complex analysis because of capacities and traffic and all of that. But from a pure density point of view, if I were to just go up to what is around me, I can probably add anywhere between 5,000 to 7,000 homes.

Great. Yeah. Okay, that's helpful. And then lastly, I know that at one point there was some conversation, speculation one might say, about Concord. And I know Lenar was very actively involved in that. and then that deal fell apart. What I hadn't heard, I have no idea if there's been any additional movement there in light of your comments about California generally and the political environment around housing, whether that has in any way, shape, or form come back into the conversation, or if there's any other potential sites that are of interest that you're doing any kind of active work feasibility analyses and that kind of stuff around.

Sure. Nothing has happened on Concord in particular. I can tell you in discussions that I have had with the state of identifying land that the state owns and finding private partners to put in a public-private partnership to start providing housing. And as you know, with the role I played up there and with the amount of involvement and who we are as a company in the state, that's where I see the possibility. But if your question is focused on Concord in particular, nothing is happening in Concord. We stopped getting involved in it. And right now, candidly, we feel that there's so much value that we can extract from our own communities in light of the shifts we're seeing, the positive shifts. Our focus has been much more on our community, especially that there's only four of us that show up at the office every day, and everybody's busy at home, and we have a big lift in San Francisco. So if you ask me, is there going to be opportunities in the future, the answer is yes, but right now we're focusing on what we have.

Great. And then last one, I promise, just kind of big picture, as we're really at the very early stages of Valencia, which is a multi-decade kind of – I'm curious as to whether you have any thoughts about how a rapid acceleration in home prices at the beginning of the project, you know, influences either the way you think that project ought to be valued or affects how you anticipate what was the optimal strategy for working through that project because that's kind of What we're seeing right now, you know, home prices up, you know, mid-teens, you know, year over year. Home's an unheard of rate. And really, I'm not in any way suggesting that's going to stop near term, but certainly that's well beyond what, you know, figures people were sort of talking about. And obviously everybody's kind of straight-lined things. So the fact that it's happening right at the beginning of your project, you know, selling, does that have any implications for how you strategically work through that project to maximize value?

Well, Steve, the answer is probably not really. I think that we obviously like to see home price appreciation because that translates to a big movement in land price. But you have to be very careful when you're developing something like Valencia. As you said, that's going to take a long time because over a long time, I don't think any of us expect the home prices to appreciate at the rate of 18% on an annual basis, and that actually is a dangerous place to go. we tend to focus on what does home price appreciation mean to affordability. And what we care about the most is staying within a range of affordability that allows a very broad base of buyers to be home buyers. That's why we deal with the product type and the diversity in products. So if you look at right now in Valencia, you will see that we start actually at 720 square foot homes, one bedroom, which is an entry home for anybody who wants to move from an apartment to a home ownership and start building equity. And we go all the way to 3,700. And as I said, you know, later this year, if you're going to go, you have to spend a few days up there because we're going to visit more than 50 model homes that cater to all of that. So our view is always about, okay, an eye on the positive side of home price appreciation and its translation to value per acre, but also a cautious eye about affordability that might start actually getting us in trouble. So we look at that. The strategy of the company, even if we've known it for a long time, has been very, very consistent, which is build the right amenities, build the right schools, build the right mix of products, attract people who really are not speculators but really homeowners and give them the program that everybody is looking for in terms of amenities, open space, sports, as well as health care and public education. And if we stay true to that, at the end of the day, we can actually navigate the cyclical nature of the business in a much better way.

Yeah, makes sense. Thanks a lot, Emil. I appreciate it.

Of course.

Thank you. And we'll take our next question from Ken Hansen with Stifel.

Thank you, gentlemen, for taking the time to answer my question. Just for full disclosure purposes, I'm with Stifel, and I'm a chartered financial analyst, but I'm calling together with a shareholder, and I'm not representing the company's interest, Stifel's interest in the firm. I'm familiar with the Great Park because I moved my office to 400 Spectrum Center Drive so I can look down on what you're doing every day. I also spent a good many years flying off those runways at El Toro Marine Base. So I'm familiar with what you've done, but I really didn't get clued in until I went over to the Harvard ASU hockey game in December of 19 and found out what a truly world-class community you were building. So I became a shareholder just this last year, and the reason I did it is because what I see you doing is so world-class, yet I look at the performance of the Class A shares, and there's a disconnect there. You rightly point that out in your page 30 of your 10-K. So that's not something that people don't know who have owned your share class. So I just wonder about why it is that Wall Street isn't rewarding me for what I see on the ground, and what can you do about it? Is it that the capital structure is too complex for people to do discounted cash flows? Is it that the rewards to the builders and their vertical infrastructure costs are higher than the rewards to the innovators like you that build the community and have these horizontal investments? Is that just a fundamental nature of the development business? But I'm curious to know what happened and what can be changed to either enlighten people or to financially make this clear so that investors really reward you for what you've done.

Well, first of all, Ken, really appreciate the nice words you used about world-class communities. It means a lot to us over here who have been working on these communities for two decades to see that there are people who are buying our shares just because they come and visit, you know, amenities and what we're doing. So let me answer the question because it's a great question, and you're talking to a frustrated shareholder, one of the largest shareholders who obviously – It's probably the most frustrating because I put all my eggs in this basket. I am very, as you know, I'm very committed to this and have been for the longest time, and it's very frustrating to see that the public market does not have an ability to see what you have seen as somebody who came and saw that. So let me just tell you, first of all, you're going to the heart of the discussion that we're currently having with our board as to how do we educate the market, how do we tell the market, but the disconnect between the value of our assets and the market cap is so large that it actually should be much more attractive for people who want to get on the ground floor of this company. So here are the things that I can tell you from my perspective have been factors, and here's what we are doing in order for us to help the market understand it. So factor number one, As you know, and obviously you do because if you're referencing page 30 of the filing, I know that you've read it, we have a very complex structure, organization structure, that came about as a result of the combination of four entities that was focusing a lot on tax efficiency for either investors or top 13 or other things. So we're looking at all of that. and trying to figure out how do we explain to the market, how do we simplify that complex structure. Number two, Valencia up until now has been a little bit of a mystery to people because a lot of people have been hearing about New Hall of Valencia for many years, and a lot of people wanted to see it, to believe it, and the good news for us is right now it's happening. You go up there, there's homes being built, and Valencia is the largest asset we have, and That is turning the corner. I think that gives us an opportunity now to start explaining to people the amount of value that exists in Valencia and the amount of cash that's going to come out. Third, half of our book value sits in San Francisco. In San Francisco, nobody is going to ask questions about the location of San Francisco and the San Francisco market and how fortunate we are to be where we are. over the last almost three years, the noise that came out as a result of the Navy and the contractor and all that has really created a lot of ambiguity about the timing, as Stephen was asking, of San Francisco. And we can actually pinpoint a shift in the stock price downward that started with the press release that came out of the Navy. I mean, I have a chart that I've shown the board that shows that the company lost almost 50% of its market cap within a very short period after the Navy came out with this noise. And I think that's going to fix itself this year with the information that's going to come out of the Navy and with us being able to articulate more and more the fact that San Francisco is going to be back on track at some point in time. The last factor that is a major factor is the only asset that has been a contributor to the company or operation up until Valencia has been the Great Park. And as Eric said and as I alluded in my opening remarks, because of the priority distribution to the legacy and the amount of priority distribution being almost $500 million, a lot of people have doubted whether the $500 million is going to be paid out in two years, five years or ten years because we, you know, it's a big number. And until that number gets retired, Five Point was not going to get the distribution, and the good news is we are announcing on this call that this year it will be retired, the priority component, and we're going to get $100 million, hopefully more, in distribution to the company. Those are factors that are going to help us bundle that, and what we're talking about now is finally, after being public for almost four years, we're going to be able to go out to the public market in June, and we're going to be able to articulate all of these changes that should change behavior. Now, you mentioned discounted cash flow. I don't think discounted cash flow is meaningful to anybody because our community is built over two decades sometimes. So when you start getting into assumptions that are past two or three years, that information is not helpful and who knows what the market is going to be doing in 2030. We believe but the best way for people to look at the value and the disconnect in asset value versus stock value is either a multiple of book or an NAB. And what we will be doing is we will be helping people like yourself, analysts and investors to understand what the NAB is and how that NAB is so much disconnected from the market capital company, which from my perspective, I believe there's almost a 4X disconnect.

Thank you. I appreciate that. I am a product of USC's fantastic accounting school, but I must say that I have to do a lot of work to get through the details of your 10K to find out what's really there. So whatever you can do to simplify would, I think, help the process. One last question for you. There's a lot of development, commercial development around you down here in Irvine, and the Spectrum Terrace, for example, up at 133, and then off the Sand Canyon 5 interchange. I'm wondering, with the pandemic and with that local build-out, how do you see that impacting your commercial build-out?

Yeah, we made a decision probably about three years ago to pivot our commercial into healthcare and life science and lifestyle retail meaning food and beverage that is really more an additive amenity to the community. Our City of Hope partnership is a big step forward and I think what you probably should expect from us is more and more in the space of commercial being targeting health care and life science. We have a lot of interest, not because of us only, but because of people who want to be in the same orbit as the City of Hope, and we have a lot of people who want to be part of that. And even the City of Hope now is expanding its footprint and asking for additional space, and they now believe that they're going to actually add potentially two more floors to the hospital. So they're expanding their footprint. and a lot of people want to be within that area. And I think that's why we don't see ourselves competing, for instance, with the airline companies in office space and a reworked type of a program. We're much more focused on a very, very specific segment, which is health care and life science.

Thanks for the time and the comments. And as an airline resident, thanks for the quality of environment you've created here. And I am familiar with Robert Stone and had a conversation with him at a mutual friend's memorial service, and he mentioned his commitment to Irvine and to Five Point, and that's an indication of the quality of people that you're attracting to your project. So I appreciate that. As a shareholder, I hope – I mean, I'm a recent shareholder, so I haven't gone through the pain and suffering that previous shareholders have – I think with the clarity that you're going to bring to the net asset value calculation and the streamlining of it and the legacy payments, that's going to make things a lot easier. So from an airline resident standpoint, thank you for what you do. And from a shareholder, I think good things are coming. Appreciate it.

Thank you very much, John. Really appreciate it.

Thank you. And once again, at the start, I'm wondering if you'd like to ask a question to me. And we'll take our last caller in the queue, Sean Serenacio, the Rosen Group.

Hi. Good afternoon. It's a pleasure to hear from you guys and a lot of, you know, really important and insightful perspectives being rendered. You know, I really appreciated you guys touching on San Francisco specifically because obviously that's been, you know, area where the timeline has been impacted relative to the initial expectations. But I was wondering if you had any update on whether we could expect to see any progress of Candlestick in the near to medium term?

I'm sorry, Sean, I was having difficulty hearing you. Can you repeat the question, please?

I apologize. No, I was just... hoping to hear whether you guys had any insight as to whether you were going to see some progress at Candlestick Point this year in San Francisco. Like, I appreciated the commentary on the shipyard and the timeline, but I know that, you know, that area is able to be advanced prior to the Navy, you know, finishing its review. So I wondered if there's any activity we can expect to see there.

Yes. First of all, the answer is yes, but it's not activity probably that you can see in terms of construction. but you're going to see a lot of more things we're going to be able to share about the alignment of interests that we have with the community and with the city and the fact that the city and people who are representing San Francisco in federal government, you're going to hear us all speak with the same voice about fulfilling commitments made to the community out there and to the city of San Francisco. I think you're going to see a lot of statements that are going to be indicating what's going to come next. We are having extremely constructive discussions with the city about repositioning Candlestick and how Candlestick could actually move forward. As you know, I have been saying all along that from a technical point of view, as it relates to the timing of the Navy cleanup, Candlestick is not entangled in any of that. But obviously, We look at it as one community that is all tied together, commitments that were made to the larger community. A lot of those benefits come from Hunters Point. And I don't want to end up sending the wrong signal to the community over there that we're moving forward with Campbell State and abandoning the community of Bayview, Hunters Point, and the community over there that really was with us from day one. So the... Short answer is yes. I think you should see movement. We believe that 2021 and 2022 will be totally different than the last two years in terms of San Francisco. But I can't tell you that that's going to translate to construction going on in the next few months. But we're definitely on the right track.

Thanks very much. That's very helpful. And I guess just a last, you know, smaller question would be, you know, I wanted to, you know, I can feel like the City of Hope is such a great, you know, archetype of, you know, a type of collaboration with a big occupier of real estate that you guys have had. And I know that, you know, you guys have, you know, monetized a large amount of the Gateway Venture. But I also know that you do retain some, you know, a building and some land. And I was wondering whether, you know, things are going as you've expected so far with regards to, you know, the construction of the City of Hope and whether you guys have a good outlook on your ability to, you know, generate more value from your residual assets and that.

Yeah, and, you know, Ken, before you were talking about the fact that he knows Robert Stone, the CEO of City of Hope, and if you were to listen to our conversations, which we have very frequently about, what we both envision here in terms of the relationship. That alone might actually move the share price. So the answer to your question is, first of all, the city of Hope is under construction. I come every day, and they're all doing the tenant improvements, and it's moving really well. We got a call from them two weeks ago that the board had a meeting, and they decided to expand the hospital by two floors, and they're now asking us for more space. And there's a lot of actually activity that's happening between the two of us that not only is going to be dealing with the cancer center and the hospital, but also in terms of collaboration together and with others about reimagining healthcare delivery, proving it in our community that they can then start exporting. We're also talking to the city of Hope potentially about having a footprint in Valencia and others who are floating with the same orbit. We have a lot of thoughts right now and plans on adding more health care providers to the area, and hopefully within the coming quarter or two we'll be able to speak more about them. But I can tell you last year has accelerated a lot of what we always were thinking of in terms of health care in our community. So stay tuned, but you're going to hear, I think, some very encouraging things. Awesome. Thank you so much.

Thanks, Sean. Thanks. Thank you. And that does conclude today's question and answer session. Could I turn the conference back over to Mr. Emil Haddad for any additional or closing remarks?

Well, thank you, everyone, for joining us. I don't know how you feel, but I'm starting to feel really optimistic about what's coming, both in terms of health and our – our dealing with the virus and the pandemic. We all are starting to see a light at the end of the tunnel. This is a different March than the March we had last year. And I can tell you from my perspective, I am so excited to start seeing us go back to a normal life with a backdrop that is so positive in terms of our industry. And I really want to take this opportunity to thank every one of our associates, who has contributed to our success last year and is working very hard from home, most of them, in terms of the balance of the year. And I want to thank our board for their support all through this period. It has not been an easy period for anybody, but we're very, very excited about where we are, and we look forward to more good news as we unfold the balance of 2021. Thank you very much. St. Patrick's Day again. Thank you.

Thank you, and that does conclude today's teleconference. Thank you for your participation. You may now disconnect.