Earnings Call Transcript - FPH Q2 2022

Operator, Operator

Greetings and welcome to the Five Point Holdings LLC Second Quarter 2022 Conference Call. As a reminder, this call is being recorded. Today’s conference may include forward-looking statements regarding Five Point’s business, financial condition, operations, cash flow, strategy and prospects. Forward-looking statements represent Five Point’s estimates on the date of this conference call and are not intended to give any assurance to the 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 Five Point’s most recent annual report on Form 10-K filed with the SEC. Please note that Five Point assumes no obligation to update any forward-looking statements. And now, I would like to turn the call over to Mr. Dan Hedigan, Chief Executive Officer. Please go ahead.

Dan Hedigan, CEO

Good afternoon, everyone, and thank you for joining our call. I am joining remotely today as I have COVID and I am still under the restrictions to isolate. So I am calling in from my home office and we have Leo Kij, our Interim Chief Financial Officer, and Mike Alvarado, our Chief Legal Officer, at our offices in Irvine; and Stuart Miller, our Executive Chairman, is also joining us from Colorado. I am very pleased to update you today on the progress of the company through the second quarter of 2022. We will also update you on our team’s focus during the quarter and on the steps we have taken towards implementing our strategies. Then Leo will give an overview of the company’s financial performance and condition. We will then open the lines for questions to our management team. Let me begin by saying that our second quarter has been a pivotal quarter for Five Point as we have focused our attention on positioning and building for our future. Although we have not actually closed land sales this quarter and we recorded an overall $11 million loss, we are positioned with near-term residential land closings that will be profitable and will fortify our already strong balance sheet. We have right-sized our operating platform with our do more with less overhead strategy and we are executing a carefully crafted commercial property strategy that will begin to produce results as well. Let me break this down and give you some more detail. Everything at Five Point today starts with our doing more with less operating strategy. While we have carefully managed our master plan communities, we have concurrently focused our attention on managing our costs of doing business. Our efforts to manage costs in our prior quarter restructuring have now resulted in approximately a 34% reduction in our expenses over the same quarter last year and approximately a 25% reduction in our expenses from the first quarter. We are continuing to focus on managing our costs, at the same time, creating greater efficiencies in our day-to-day operations as we continue to drive greater productivity across our platform. With a smaller and more efficient operating team, we have done a top-down real valuation of each of our communities, carefully positioning our high-quality residential sales, begun a commercial properties execution program, and reconfigured our engagement with our public partners in San Francisco to position our high-value properties there for contribution in the future. On the residential side of our business, our second quarter activity is focused on moving our residential programs forward by closely monitoring the current macroeconomic headwinds facing the housing market. Even while the residential markets have cooled both nationally and in California, as expected, in response to the Fed’s aggressive and rapid interest rate moves or reaction to inflation, well-located residential land in California is still in demand as the California housing shortage continues to be a dominant theme. While there is some uncertainty in the new home market, the long-term outlook remains quite favorable, given disciplined mortgage underwriting standards that have been in place, the favorable demographics to support the need for new housing, as well as the general overall shortage of housing supply. Experience tells us that at times like these in the new home market, the very best, well-planned, and executed master plan communities retain the greatest value and move through market uncertainties with the best results. Five Point has two active and very strong master plan communities with a level of maturity and position in the market that we believe will, along with our strong balance sheet, allow us to address market demands while outperforming current market conditions. Accordingly, we are moving forward with land sales that are expected to close in the third and fourth quarters of this year, which will build profitability and enhance our already strong balance sheet. In addition to our high-quality residential land strategies, we are now beginning to market some extraordinary commercial land opportunities in both the Great Park and in Valencia. The maturity of both of these communities and our current stage of completed land development put us in a position to begin blending our commercial opportunities with our continued residential land sales programs. We are quite certain that these first of their kind offerings in very constrained commercial markets will meet with strong market acceptance and we look forward to building stronger revenues, greater cash flow, and greater bottom-line profitability as these commercial properties come online. Of course, our strong communities and our unique product offerings are complemented by our extremely well-positioned balance sheet to enable us to maximize value with patient offerings to allow us to match the right offering with the right purchaser. At quarter end, our balance sheet was rock solid with a 25% debt to total capital ratio, $128 million of cash on hand, and none drawn on our $125 million revolving credit facility, giving us available liquidity of $253 million. While Five Point has a very solid balance sheet, we are looking to strengthen that position as we run an ever more efficient business. We are increasing our focus on cost management and are increasing cash flow, with a particular focus on carefully matching land development capital deployed to residential and commercial land sale executions in order to create more revenue with less cash deployed. Again, our strategy is to produce more with less. Five Point is driving efficiency in every part of our business. Now, let me turn to our community review. The Five Point communities at Great Park and Valencia continue to sell homes, but at a somewhat reduced absorption rates. As has been the pattern in prior new home slowdowns, coastal California holds up better than the inland markets, and that is what we are seeing at our communities. During the second quarter, builders at our Great Park community sold 37 homes, down from 94 homes in the first quarter, due in large part to limited inventory of homes for sale in our only open neighborhood, Rise, and the recently opened Solis Park. Rise is nearly sold out with only 22 homes remaining to be sold. Solis Park with 849 homes had the first model complex opened in July, with the balance neighborhoods planned to open late August through September. These homes will greatly expand available homes for sale in Great Park and should increase home sales in the community as well. During the quarter, we initiated the land sales process in our next residential community seeking bids for District 5-South, a community of 719 homes and 11 neighborhoods. Even with the uncertainty in the market, we received strong interest and have accepted bids on eight of the 11 neighborhoods that were in the offering. We are now working with successful bidders to complete their due diligence and move forward in the sales process. These eight programs are with seven different builders, which provides our Great Park entry with good diversity in our builder base and minimize the impact on any one builder on the closings for this community. While our venture had bids on the three remaining programs, we feel there will be more value created by either holding them off the market for now or working with our guest builders to design higher value new home programs for these three sites. As to the eight programs we are proceeding with, the bids were highly competitive and the pricing was strong. We do not expect to contract for the last three neighborhoods this year. Our anticipated Great Park land closings are projected to be approximately 660 homes for the year versus our original projection of approximately 850 home sites and we will push the sale of the remaining 190 home sites into 2023. In Valencia, new home sales by builders totaled 168 during the second quarter, down from 211 homes in the first quarter. Valencia has now sold a total of 725 homes out of 1,268 home sites in our first 18 neighborhoods since our opening in May 2021 through June 2022. We now have 16 open neighborhoods as two substantially sold out during the quarter. We have also now closed our 500th home and the community is filling with families and taking on a life of its own. We have also been looking at our planned home site sales in Valencia in the fourth quarter of this year to better match the current sales pace and market demand. Looking at the current market, our expectation is we will reduce our anticipated lot sales from our original projection of approximately 350 home sites to approximately 160 home sites. The reduction will be primarily in the higher density product segments to avoid additional product overlap and to give the existing builders more time to work through their open programs. As the master developer, we feel it is important to continue to monitor the market and work towards the sales success of all the neighborhoods in the community. Sales of these home sites will move into 2023. San Francisco remains a priority for Five Point and for the City and County of San Francisco. It has irreplaceable land along San Francisco Bay with a broad mix of approved development opportunities. This quarter, a new Executive Director of the Office of Community Investment Infrastructure, the lead government agency for the project, was appointed. We are actively engaged with new leadership to understand the economics of the current development plan and how the current titles can be rebalanced in order to move forward across the two sites to allow Candlestick to move forward ahead of Hunters Point Shipyard. Working with our public partners and using our experience and lessons learned from other fan communities, we continue to review the various options to initiate development in San Francisco, including how best to leverage the tax increment financing available to the project. San Francisco will remain a work in progress as we work through these issues, but it is a project we are focused on and to which we are fully committed. I am pleased by the swift action and progress we have made in advance to promote our five core strategies. While some of this will repeat prior comments, I think it is important to not lose track of these important priorities and where we stand on each. The optimization and rationalization of our cost structure is a continuing focus. We continue to focus on the strategy of doing more with less. We continue to look for opportunities to create operating efficiencies across the company. With a focus on accountability, we are looking to drive bottom-line performance, drive cash flow, and fortify our balance sheet while building shareholder value. Another core priority has been to continue our work on development plans for the 23 million square feet of planned commercial opportunities in our three communities, with an active focus on Great Park and Valencia. We have completed our full review of commercial opportunities at Great Park and are in the process of doing the same in Valencia. On top of the ongoing residential opportunities at Great Park, our commercial parcels were offered to the Orange County commercial market, something that has not been available for years: large parcels of entitled land of flexible entitlements, which can offer a multitude of uses, including life sciences, R&D, office, and industrial. The majority of these commercial parcels are near City of Hope’s new cancer treatment facility, and a future dedicated cancer hospital, which broke ground last week and is a perfect use to support a strong life sciences market. These unique attributes create a great opportunity for the Great Park Venture, and one we will be patient with in order to drive maximum revenue and maximum bottom line. We are also actively working with the City of Irvine to support their vision for completing the Great Park and to add multiple multi-family housing opportunities to build much-needed housing to fill the ongoing California housing shortage. Both will create value for the City of Irvine and support and enhance the value of our ongoing residential and commercial land holders. We anticipate all of these ongoing efforts will drive greater cash flow in 2023 with our Great Park Venture and each year thereafter, which will result in greater distributions to Five Point. On top of our commercial review at Valencia, we are also actively looking to add multifamily opportunities to our mix of land offerings. Multifamily is both a strong real estate segment and will also help address California’s current housing shortage. We are committed to continue to work with our public partners and community leaders to help address the current housing shortage. I have included San Francisco in my community remarks. It is one of our five priorities, and we will continue to work with our public partners in San Francisco to move the community forward in a cooperative and economically viable manner. Last but not least, Five Point continues to look for opportunities to expand our leadership in building sustainable, mixed-use communities in California. Our certified program delivered a net-zero greenhouse gas community at Valencia has set an industry standard. This differentiation from other planned communities will continue to support our home sales. In summary, our second quarter is one of progress for Five Point. We are gaining confidence in our strategies and feeling ever more enthusiastic about our future. We have made material progress in rationalizing our cost structure, enhancing our residential offerings while at the same time, looking to seize upon our commercial opportunities and enhance our commercial revenue. I remain optimistic about both the short and long-term future of our company, acknowledging that the housing market is in a period of flux because of the Fed’s aggressive efforts to address inflation through interest rate increases. We have two very well-located, attractive open communities and are well-positioned to ride out the current market uncertainty. But know that as market uncertainty clears, we will be best positioned for continuing success. We are monitoring the impact of rising interest rates and inflation and buyer demand for housing, and we will adjust our plans proactively to maintain the values of our master plan communities. Now let me turn it over to Leo, who will report on our financial results.

Leo Kij, CFO

Thanks, Dan. A summary of our financial results was included in the earnings release issued earlier today in which we reported a consolidated net loss of $11 million for the quarter. While no land sales were closed, we did recognize $5.4 million in revenue that was mostly generated by our Valencia and management company operations. Selling, general and administrative expenses were $12.7 million, which represents a significant reduction compared to $19.2 million for the same quarter last year. The decrease is primarily as a result of a reduction in headcount, as Dan has pointed out, and as reported during our previous earnings call. We continue to invest in inventory during the quarter, which increased by $42.9 million. This is mostly related to land development and activities in Valencia. Also included in this increase is capitalized interest on our senior notes. Reflective of our continued investment in our inventory and a $24.6 million interest payment on our senior notes, our cash balance decreased to $127.8 million at the end of the quarter. We currently have no outstanding borrowings under our $125 million unsecured revolving line of credit. Our debt to total capitalization ratio was stable at 25.2%, and our net debt to capitalization ratio after taking into account our cash balance was 21.1%. The company has four reporting segments: Valencia, San Francisco, Great Park, and Commercial. Segment results for the second quarter are as follows: the Valencia segment recognized a $2.9 million loss for the quarter. There were no land sale closings in Valencia. However, the segment did report revenue of $2.6 million. Most of this revenue related to changes in estimates of variable consideration from those amounts previously recorded. This includes profit participation that we collect from our homebuilders. Selling, general and administrative costs of $3.6 million were primarily comprised of selling and marketing expenses in support of our first development area, as well as employee compensation costs incurred to support the segment’s operations. The San Francisco segment recognized an $814,000 loss for the quarter. This loss is comprised of general and administrative costs incurred to support the segment’s operations as they focus on reassessing the development plan and approval process for our San Francisco assets. Our Great Park segment reported a net profit of $1.9 million for the second quarter, which was comprised of $1.5 million in income from the Great Park Ventures operations and approximately $400,000 in income from management services we provide to the venture. Segment revenues were $27.9 million, which included $23.3 million from the closing of 13 homes under the venture’s fee build program. Also, the segment recognized $2.6 million in management fee revenues. There were no land sale closings at the Great Park in the second quarter. The profit recognized by the fee build home sales of $5.4 million was partially offset by the venture’s selling, general and administrative expenses of $4.4 million. The expenses were mostly comprised of selling and marketing costs incurred in support of home sales, including those anticipated at the next neighborhood planned to fully open later this summer, Solis Park. The remainder of the expenses relates to general and administrative costs incurred to support the venture’s operations. During the second quarter, and as previously announced, the initial term of our development management agreement with the Great Park Venture was extended through December 31, 2022. Compensation for this extension was revised to eliminate the variable cost reimbursement component and to increase the 2022 annual fixed base fee to $12 million. This extension did not change the agreement’s incentive compensation provisions applicable to the initial term. The provision continues to provide for incentive compensation payments equal to 9% of the venture’s distributions available to be made to holders of percent interest ownership. However, if the development management agreement is not extended by mutual agreement of the parties beyond December 31, 2022, the management company will only be entitled to incentive compensation payments equal to 6.75% of distributions paid during 2022 and thereafter. We own 37.5% of the interest of the Great Park Venture and 100% of the management company. Although the Great Park segment reports the full results of the Great Park Venture, our investment in the venture is reported under the equity method of accounting, and therefore, the assets, liabilities, results of operations, and cash flows of the venture are not consolidated with our financial statements. The company’s equity and earnings from the Great Park Venture after adjusting for a difference in investment basis was approximately $200,000 for the quarter. The Great Park Venture is a self-funding operation with no debt and had a cash balance of $118 million at the end of the quarter. Our Commercial segment income was approximately $200,000 for the quarter, which included $100,000 from operations of the Gateway Commercial Venture and $100,000 from the services provided by our management company. We own 75% of the Gateway Commercial Venture and 100% of the management company. Our investment in the venture is reported under the equity method of accounting, and therefore, the assets, liabilities, cash flows, and results of operations of the venture are not consolidated within our financial statements. Five Point’s equity and earnings for the quarter from the Gateway Commercial Venture was $100,000. With that, I’ll turn it over to the operator for questions.

Operator, Operator

Thank you. We will take our first question from Alan Ratner with Zelman & Associates.

Alan Ratner, Analyst

Hey, guys. Good afternoon. Dan, hope you feel better soon. Quick recovery. So I guess, first question on the discussion on the commercial side, I was wondering if you could maybe help frame that a little bit for us just in terms of either magnitude of transactions that you’re anticipating over the next 12 months or so? Price point in terms of acreage, any kind of color you can give us a little bit in terms of where you anticipate that going, I think, would be helpful considering it hasn’t really been a core part of your business up to this point?

Dan Hedigan, CEO

Well, Alan, thank you. I actually am feeling pretty good, but you might notice that my throat gives out on me every once in a while. So I’ve been one of the very fortunate folks I would call the head cold case of COVID, but it still gets to your throat. So if I pause here, it’s because I need to take a drink of hot tea I have in front of me. But on the commercial side now, one of the Irvine Company is our neighbor on many sides and their commercial development spectrum kind of ends where our property starts. And so there has been a natural market created in that area. And the Irvine Company hasn’t sold large blocks of land in a long time. If you had the opportunity to visit our properties, we do have large contiguous blocks of land that have not been in the market. Now we obviously have been doing an extensive review of those assets over the last quarter. And we are working with CBRE and looking at a strategy for bringing these properties forward. As with everything we do, we want to be sure we’re really going to maximize the value across all of our assets. We don’t think it’s one of these things where we should flood the market as much as we should be strategic about what and when we bring it to the market. So that sizing is literally – as we’re talking, we’re in active conversations where we are sizing what we think the market will take right now. But as many of you know, we have very flexible zoning in our commercial properties, which is also a very unique attribute and with our development agreements in place today. So when we get on the call for the third quarter, I’ll be able to give you some very specific information, both about what land we thought was the right size to take to the market right now. If you’ve been following the industrial market at all, and I’m sure you have, we think our values are very competitive with what folks are seeing in this area in the industrial side. But that’s only one use. We have incredible synergy with City of Hope there now. So we think there is a lot of opportunities and we’re going to be very strategic to really maximize our income.

Alan Ratner, Analyst

Got it. I appreciate the extra color.

Dan Hedigan, CEO

But if you kind of think about it, if you know the property, we have something called – we call south of the railroad tracks, which is most of our commercial holdings, although there will be some on the other side. There is almost 200 acres there. Industrial properties today in parts of Southern California are going between $5 million and $7 million an acre.

Alan Ratner, Analyst

Got it. Okay. That’s helpful. I think that sounds higher than maybe what the implied value was when you guys did the City of Hope, if I remember correctly.

Dan Hedigan, CEO

The market has moved in our favor.

Alan Ratner, Analyst

Perfect. Thank you for all of that color. Second question, I know it’s probably a little bit ways off into the future, but just given that you kind of reiterated the commitment to San Francisco. Can you just help us think a little bit about what the cash flow needs of that project will look like once it does get off the ground? I mean if I look back at Valencia, you had about a year’s worth of development before your first lot sell there. It looks like maybe that totaled $250 million, $300 million before revenue started coming in the door there. So I would imagine there is going to be a period when San Francisco does get up and running where it will be a cash drain on the company. And while you have liquidity today, which obviously can fund your current operations, I would think that, that would be something that would require some type of capital raise. So any commentary or any thoughts there, just either in terms of timing, magnitude of kind of the expected outlay before that project starts the cash flow?

Dan Hedigan, CEO

Well, the part that is maybe not as clear, the whole project has extensive underwriting and thought through that process. It was always thought of as one project, not as kind of two standalone projects. So the biggest thing that we’re working on right now, and we’ve had some very positive meetings with the public officials up there, is that we need to rationalize the economics so that we can move more quickly on Candlestick. And so those type of questions are actually perfect questions, Alan, and they are good questions. But until we can really work with the public officials to understand how we’re going to move forward as two standalone projects as opposed to one concurrent project, and Hunters Point will follow, but I think that it will be a lot like what we’re doing today, it will require some cash. Along the way, it’s going to generate cash, both from sales. It will have opportunities for sales there, especially commercial sales there. The first pad we have out there identified as a commercial pad. And then we also have public financing that can support us. So I don’t have an exact budget today, but it is one of the things that we are deep diving with the public officials to understand that and how best to move forward.

Alan Ratner, Analyst

Alright. Okay, well, we eagerly await more details on that. So, looking forward to hearing more about that. Thanks a lot.

Operator, Operator

We will take our next question from Ryan Dobratz with Third Avenue Management.

Ryan Dobratz, Analyst

Hi Dan and Leo. Thank you for holding the call and Dan glad to hear that you are doing well considering the circumstances. We all appreciate...

Dan Hedigan, CEO

Thank you.

Ryan Dobratz, Analyst

Yes, absolutely. And I also appreciate you providing the very thorough update on the five core strategies, which the company is focused on. And we are just hoping to ask, I guess a few quick questions here about the communities and positioning going forward. So, if I could just jump in, it would be terrific to start with Great Park. Clearly, there is a lot of momentum there. With that being the case, would it be possible to add any context relating to the revised management contract for the venture? In particular, maybe why it was only extended through year-end as opposed to maybe a more traditional multiyear arrangement?

Dan Hedigan, CEO

Sure. I mean absolutely no problem at all. Obviously, we have been in partnership with our other three partners there for a number of years. We actually thought that the best way to move forward with them is in a transition period with management, with myself joining the company, and we actually thought that we need to get them comfortable with what we are doing, where we are going, and who I am. Rather than the contemplated three-year agreement, we thought it would be more fair to them to just move forward on a one-year basis and really build that relationship that we need with them to kind of work through everything. To-date, I will tell you, we are working very comfortably with them. It’s going really well. We are having calls with them every two weeks, very positive calls because we talked about that commercial strategy at Great Park; they are an integral part of that. We need to work with them closely, and they are very supportive of where we are heading and what we are doing. So, it was really just kind of a decision that that was how best to really respect those partners and give them an opportunity to get to know me and know where we are heading on a transition basis.

Ryan Dobratz, Analyst

Okay. That’s helpful. And great to see the City of Hope center opened last week with the ribbon cutting, very exciting. In terms of – I am sorry, please go ahead.

Dan Hedigan, CEO

It was very exciting. For those of us who were there, it’s an amazing facility. And if you guys don’t know, City of Hope is ranked the seventh cancer hospital in the country. So, it is a huge – that is a huge position in the country. So, it’s a really value-add to our holdings.

Ryan Dobratz, Analyst

Great. And if it would be alright to maybe just turn over to Valencia real quick. It seems like things are generally progressing there quite well. That being so, would it be possible to provide a frame of reference of how much more capital is going to be needed there to build out the 2,100 or so remaining lots at Mission Village?

Dan Hedigan, CEO

Sure. There is a lot of in-place infrastructure, especially some of the near-term commercial we are looking at there. All the infrastructure is in place and all of the current residential infrastructure is in place. But as you talk about the build-out, it’s probably – and it’s over the next couple of years, not anything necessarily in the near-term. There is probably a couple of hundred million of capital that’s required. Some of it is actually for development there, and some of it is really kind of getting us positioned for additional communities that are coming down, and a lot of it is timing dependent. So, it isn’t something we have to do at a particular time. It’s going to be dependent upon the market and what our needs are. But at a rough level, it would be a couple of hundred million over a couple of years, but also should be offset with revenue opportunities that are coming in concurrently or very near to concurrently. So, we will be harvesting revenue and we will also be investing some capital.

Ryan Dobratz, Analyst

Okay. That’s helpful. I mean putting per lot values up there at, call it, $250 to $300 a lot with 2,100 lots remaining, that would get you to a figure that’s more in excess of, I guess what was sort of indicated would be needed there to finish it out. So, that’s positive. And I guess somewhat related to Valencia, it really hasn’t been much of a focus more recently, but the company owns approximately 16,000 acres in Ventura County as well. I think it generates some agricultural and energy income. And while we recognize that you’re still kind of settling into your role, have you given any thought to what the potential use or value of this really unique land position could be over the medium to long-term?

Dan Hedigan, CEO

I haven’t really spent any time really considering that. I have been really focused on what we have in place, the residential, the commercial opportunities we have. And you are right in identifying that as a kind of a deep long-term asset, but we really haven’t looked at the opportunities because of, in front of us, we have a lot of entitlements in Valencia that we really need to focus on. And so we really haven’t focused on where that one could go. But you are right, it’s actually out of the county, it’s in Ventura. This would really be a different jurisdiction, and we are currently working, obviously, closely with the County of Los Angeles for our current Valencia program. But that’s one that I think we are going to – that one is a great kind of future opportunity, but it really is kind of – it really is a future day before we start digging into that with any level of detail.

Ryan Dobratz, Analyst

Is it a contiguous piece of land? There is not a great deal of information on the entire 16,000 acre land position.

Dan Hedigan, CEO

Well, some – it is all held together. Some portions of it, as you would expect, if you kind of followed development in California, some portions of it is dedicated open space. It’s already dedicated and it’s part – even parts of that are tied into our entitlement at Valencia. So – but it really was Newhall Ranch was an incredible piece of property, and it does kind of extend into Ventura County. But that’s kind of a – I would call that the deep future for another day. Always great to own California land if you have got a long view.

Ryan Dobratz, Analyst

Alright. And then I just have one final question, if I may, and more of just kind of an industry-specific question. And you clearly have had a lot of great experience at Irvine, which is a wildly successful private enterprise. Now that you have been in your CEO seat for a few quarters, I just wondered if you could maybe talk about what some of the advantages as well as maybe disadvantages are of running kind of a land development company as a public entity versus as a private entity? I would imagine there are trade-offs on both sides. It would be great to hear your perspective on that.

Dan Hedigan, CEO

I got to have a glass of wine someday and go through that. I mean there are pros and cons on both sides. You are right, I have looked at it from both sides. I have seen it from both sides. Land is such a unique resource that when I really think about it, the biggest challenge we have in this business right now as public is the quarterly reporting. Beyond that, land is – I mean I have got lots of land development experience. I have been through lots of cycles, up, down, you name it, after 30-plus years. The only thing is when you try to think about land as a quarterly enterprise, it really doesn’t break down walls as a quarterly enterprise. But that’s probably the biggest differentiation. Once again, though, the biggest thing, and I come from a background of discipline, is that the public market does put a discipline on us that we are going to have to do more with less, especially kind of with the quarterly reporting. I am really bringing that focus to our team right now because I know I am going to get to chat with all of you every quarter and I want to be able to hold true to what we are trying to accomplish as a company. Public-private discipline is incredibly important to be successful. But you guys are going to hold me accountable every quarter. That’s a real difference. So, I mean I can’t – but I would say, land development, it has its unique attributes, and I don’t think it changes by whether you are private or public. It does take a lot of patience to really maximize value over time. You don’t want to be in this business with a short view.

Ryan Dobratz, Analyst

Alright. Thank you for that and congrats on the progress so far. Thank you.

Dan Hedigan, CEO

Thank you.

Operator, Operator

Thank you. We will take our next question from John Moran with Robotti & Company.

John Moran, Analyst

Hi. Thanks for taking my questions. Just in reference to your comments about improving the balance sheet, I think you have made them in the past few quarters as well. In terms of the commercial property sales or deals, you said something about marketing commercial opportunities. Are those outright land sales? And also, you didn’t mention anything about Valencia. Is there anything active commercially in Valencia?

Dan Hedigan, CEO

John, thank you. Thanks for the question. And you know what, let me start with your second question because if I haven’t been clear, I apologize. Absolutely, there are commercial opportunities in Valencia. We are actually refining those a little bit more. We really started with refining Great Park commercial, but we are actually in the process in Valencia. There are commercial sites available to us today with infrastructure. That conversation about infrastructure doesn’t need infrastructure. We actually are actively looking at all of those right now, and we do believe there are commercial opportunities there that we will shortly be bringing to market. Once again, we are trying to really do the same disciplined study we did in Great Park for Valencia. So, that process is just kicking off. We did one now, we are rolling into a second, but there are opportunities there. Then, John, I am sorry, what was the first part of your question?

John Moran, Analyst

Well, are those – so I can – I thought what you mentioned, yes, sales, and what you – your comments at Great Park were really helpful about values there and how much land is less. So, obviously, if you liquidated that, that would have a material impact. I don’t think that’s what you were suggesting. But my point is if you are going to improve the capital structure, strengthen the balance sheet that – I mean the only thing when I look at your company, that suggests outright land sales or asset sales. Is that – so can you confirm that’s being contemplated?

Dan Hedigan, CEO

Yes. John, first of all, one of the words I use, I want to be sure you know it is, it’s not in my vocabulary, liquidation. That’s not our business. And so I know that you are not implying... but yes, our thought is, and once again, in a very measured, managed, disciplined approach we are looking at commercial land sales. The thinking around that is that really looking at where the most, the highest value demand is today and then only offering a portion of our property to the market because we think, over time, we are going to build a lot more value. We want to be sure we continue to build on that. So – but the current – absolutely, the current thinking is now, there are land sales. But with capital, we could do more. It’s kind of like a – it will be a process. But right now, there would be cash-generating land sales, and they are going to be measured to really maximize value.

John Moran, Analyst

I guess I might make a comment in closing for me, I think since this company has come public, every quarter, there is a reference to debt to total capital or debt to total assets. I understand that in a textbook, 20% debt to capital would be a low debt balance, but it’s something altogether different when the left side of the balance sheet is all land that essentially isn’t earning anything, and the velocity on and the turnover is going to slow down. The coupon that’s on the debt, I think expressive of how conservative or lack thereof is embedded in the balance sheet. I know there is not much trading volume in the bonds, but they are trading at 86 or something to yield double digits. My point is, I don’t – when you go into a recession, you own land, and the processor company could, I think vouch for that, those ratios mean nothing because you can’t borrow on land in a recession or a downturn. So, I am in big favor of selling some land assets, and there is a lot of capital commitments or needs ahead of you. I just assume this thing to be run debt-free when you have got hundreds of millions of dollars in spend in front of you. Anyway, that’s just my few cents, but I appreciate you taking the question.

Dan Hedigan, CEO

Alright. John, I appreciate that. And once again, I am looking forward to talking to you in the third quarter. I think that we will have a much better idea on those commercial sales we are talking about now come the third quarter. I think that some of your questions will be better for us to – we will better be able to address after we get through one more quarter.

John Moran, Analyst

Thanks very much.

Dan Hedigan, CEO

Alright. John.

Operator, Operator

Thank you. And at this time, that does conclude our question-and-answer session. I would like to turn the conference back over to Mr. Hedigan for any additional or closing remarks.

Dan Hedigan, CEO

Well, thank you. On behalf of our management team, we want to thank you for joining us today on today’s call, and we look forward to speaking with you next quarter. Thanks again.

Operator, Operator

Thank you. And that does conclude today’s conference. We thank you all for your participation, and you may now disconnect.