Robert Wetenhall - EVP, Capital Markets Emile Haddad - Chairman, President, & CEO Erik Higgins - CFO & VP

Paul Przybylski - Wells Fargo Securities Timothy Daley - Deutsche Bank Michael Eisen - RBC Capital Markets Alan Ratner - Zelman & Associates Stephen Kim - Evercore ISI Neal BasuMullick - JPMorgan Chase & Co. Scott Schrier - Citigroup

Greetings, and welcome to the Five Point Holdings 2018 Second Quarter Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. Today's conference call may include forward-looking statements regarding Five Point's business, financial conditions, operations, cash flows, strategies and prospects. Forward-looking statements represent only Five Point's estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could affect future results and may cause Five Point's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described in today's press release and Five Point's SEC filings, including those in the Risk Factors section of the most recent annual report on Form 10-K filed with the SEC. Please note that Five Point assumes no obligation to update any forward-looking statements. With that, I'd like to turn the call over to Bob Wetenhall, Executive Vice President of Capital Markets.

Welcome and good afternoon. For investors new to the story, I want to highlight that Five Point is an owner and developer of large mixed-use communities in California. Our communities are planned for more than 40,000 residential homes and 23 million square feet of commercial space in Los Angeles, San Francisco and Orange County. I'm joined this afternoon by CEO, Emile Haddad; CFO, Erik Higgins; Chief Legal Officer, Mike Alvarado; and our co-COOs, Kofi Bonner and Lynn Jochim. I'm now going to hand it off to Emile, who will provide an overview of market conditions in California, followed by a brief synopsis of our long-term strategy as well as a recap of second quarter results. Erik will then discuss our second quarter financial performance and liquidity.

Thanks, Bob. Good afternoon, and thank you for joining us. Let me start by saying that the operating environment in our markets remains very favorable. After 6 years of strong job growth in San Francisco, Los Angeles, and Orange County and a very limited number of new homes built, we are seeing pent-up demand driven by the compounded effect of the imbalance in supply and demand. Over the past several months, the headlines in San Francisco and Los Angeles had been about the housing crisis. The lack of available land in the primary markets in California and the lengthy approval process will continue to constrain the supply of land available for development. This dynamic is what gives Five Point its competitive advantage. We control a substantial share of the land available for future development in San Francisco, Los Angeles, and Orange County. Today, each of our communities is operational and our management team is in the process of unlocking the value contained in our irreplaceable land assets. Our management team has also stayed true to our long-term strategy for many years. Three points inform our[ph] strategy. First, we have a dominant market share of available land in three of the strongest markets in the country in which there is very little supply. Second, we have a continuous focus on creating value by accelerating the virtual cycle in our communities. This includes building state-of-the-art schools, amenities and commercial uses that complement residential development. We also create value by opportunistically enhancing our entitlements. Third, we have maintained a strong balance sheet, which allows us to execute on our strategy. The past quarter was simply another step towards advancing our strategy. In San Francisco, we received unanimous approval from the Board of Supervisors to add 2 million square feet of commercial space to our existing entitlement. The Board's action is another vote of confidence in our public-private partnership with the city of San Francisco and its commitment to transforming Candlestick Point and The San Francisco Shipyard into world-class mixed-use communities. We also continue to work on building infrastructure at Candlestick Point. At Newhall, we continued working on developing the first phase of our community. Newhall is designed to include a total of 21,500 homes and 11.5 million square feet of commercial space. The first phase, which we refer to as Mission Village, will include over 4,000 homesites and 1.6 million square feet of commercial space, and we are on track to have our first deliveries to builders in the fourth quarter of 2019. At the Great Park, to date, we have sold 5,000 homesites representing approximately 50% of the 9,500 homesites for which we are currently approved. A sports complex more than twice the size of Disneyland has been completed, and this summer so far, we have had 17 live concerts at our 12,000-seat amphitheater. Finally, before I turn the call over to Erik for the financial update, let me address the issue of environmental testing at Hunters Point Shipyard, which has been in the news lately. Here are the facts as we know them. The Navy published its testing plan for the next parcel that is scheduled to be delivered to us. The plan is currently being reviewed by federal and state regulators, and sometime within the next few days, the Navy is expecting to receive comments on the plan. Once that occurs, the Navy is expected to publish a schedule for testing. The Navy has also held several public briefings. It is important, however, to reiterate what we have previously shared with the markets. First, our focus for the next few years will be on Candlestick Point, which is not a decommissioned Navy base and thus is not subject to any Navy activity. Second, it is critical to reemphasize that our agreements with the city of San Francisco and the Navy require the Navy to deliver clean the parcels with the appropriate sign-offs and that the Navy will stand behind their cleanup obligations. With that, now let me turn it over to Erik, and we will be happy to take your questions afterwards.

Thanks, Emile. A summary of our financial results was included in the earnings release issued earlier this afternoon. As we’ve discussed in previous calls, our consolidated financial results for the next few quarters will reflect our continued investment in planning and development at activities at Newhall and Candlestick as we prepare these communities for land sales. Our results for the second quarter of 2018 reflect a land sale in Heritage Fields, which closed in May, and continued inventory expenditures. As a reminder, our Newhall and San Francisco communities are consolidated on our financial statements, while the Great Park Venture and the Gateway Commercial Venture are unconsolidated entities that are accounted for using the equity method of accounting. Revenues for the second quarter totaled $13.1 million and were primarily generated from management services. For our unconsolidated investments, which include our 37.5% investment in the Great Park Venture and our 75% investment in the Gateway Commercial Venture, we recognized a gain of $9 million, which was primarily due to our proportionate share of the Great Park Venture's net income for the quarter. Great Park Venture's net income was $37.5 million for the quarter, which resulted from the sale of 536 homesites on 33 acres. The base purchase price was $166 million or $5 million per acre, and the gross margin at the partnership level was 30%. Five Point's 37.5% proportionate share of the venture's $37.5 million net income was $14 million. And after adjusting for the basis difference, our equity in the earnings of the Great Park Venture was $8.9 million. Corporate and divisional SG&A was $29 million for the quarter, while interest income was $2.9 million. As a result, the net loss for the quarter was $11.3 million. Now let me address some of the changes in our balance sheet during the second quarter. Our cash balance at the end of the quarter was $679 million. We had no outstanding borrowings under our corporate revolver, which results in the liquidity of approximately $803 million. Total booked capital at June 30 was $1.9 billion and our debt to total capital ratio remained at 24%. One last point, during the quarter, we facilitated an exchange of approximately 2 million operating company units for common shares. The result is a reclassification of approximately 26 million from our non-controlling interest line item up to members' capital. In addition, due to the company's increasing ownership of the operating company resulting from these exchanges and other tax attributes the company receives as a result of the exchanges, our liability under the tax receivable agreement increased by $15 million. Let me turn it back to the operator now, who will open it up for questions.

[Operator Instructions]. Our first question comes from the line of Stephen East with Wells Fargo.

Yes, this is Paul Przybylski on for Stephen. First, I was wondering if you could provide us any color on the Great Park and how the builders sell-through has been at Cadence and if there is any change in demand by price point there or incentives or what kind of pricing power the builders are seeing.

Paul, this is Emile. We are still seeing a very consistent performance by the builders at Cadence that we've experienced at Parasol and Beacon. So from a sales rate point of view, so very much in line with expectations of past performance. We haven't heard anything from the builders in terms of any softening at the price point that we are selling at, at Cadence right now.

Okay. And recognizing that this really isn't part of your daily business generally, what do you think is happening with the consumer and affordability? Does that change your plans going forward as you bring these projects out of the ground with respect to density or price points? And along those lines, what kind of density or price points should we expect for the first phase at Newhall?

Sure. So let me say first, I think that this is -- it's very -- I think it's very dangerous to look at the housing market as one total housing market and apply one thought process across the country because there are certain markets that are much more sensitive right now to price points and the elasticity of movement. In our markets, because we are basically in San Francisco and Los Angeles and Orange County or in the primary markets, we haven't seen really a softening of the demand as a result of any price movement, and that's mainly because there is very little supply. However, we're constantly, as a company, looking at making sure that we don't push the envelope in terms of price points. So when we look at products, we are all the time thinking about products that are going to stay within a certain band of pricing that doesn't start pushing above a certain level. The word density is dangerous because we don't look at it only in terms of intensifying the products but creating different type of creative product and lifestyle that goes with it. So the answer is we're always looking at products to counter the price escalation that we see in order for us not to push the envelope on affordability.

Okay. And at Newhall, I guess what consumer is going to be your primary focus with Mission Village?

We've been -- we are seeing right now a lot of family. As you can imagine, that's a big family community. If you are in L.A. and you're looking for good schools and an environment that is pretty much a family environment, you don't have a lot of options, and that's what we cater to. And we pulled from 4 employment markets, and we pulled from the Los Angeles market, Downtown, we pulled from San Fernando Valley, the studios in Burbank, and we have a big local job market. Mainly family, we’re right now in the process of developing our product over there, and I think once we unveil that, you're going to see that we're introducing a product that's going to be very fresh and new to that marketplace.

Okay. Will it be fair to assume that it’s may be a first move-up type product or a second move-up?

I think it will be probably first and second move-up. I think that you will -- we will see that we will provide some opportunities for even first-time homebuyers with some of the products we're looking at right now. We're also seeing a lot of move down in that market, people who lives in bigger homes in Valencia who are looking to stay within that area, be close to their kids and family but are looking for more of a product that is less maintenance.

Our next question comes from the line of Nishu Sood with Deutsche Bank.

This is actually Tim on for Nishu. So my first question is in regards to the deliveries out of Newhall that we're expecting for 4Q '19. Just since there's going to be one quarter of deliveries, could you help us get a better handle of the number of lots that are expecting to get put forth towards the builders next year?

Yes. I mean, I don't want to put out the number not because of anything but because we are in the middle of land development and a lot of what is going to drive the number of homesites that will be delivered is how many homesites would we have ready for delivery. And as you can imagine, when we get into a rainy season and all that, that number is a little bit of a moving target. But if you're asking in terms of the demand, the demand is there in that marketplace. And if we were able to produce 1,000 or 1,500 homesites, then the market demand is there. So I don't want to give up the number now. As we get closer, I will be more comfortable giving a number, but it's going to be a very meaningful number of homesites.

Understood. And then following up on that topic, so just curious as to -- thanks for the helpful color on Paul's question regarding the general demand that you're seeing in the market, but just curious, could you help us understand, I guess, the split in terms of the foreign buyer demand because it does tend to have a bit more exposure in your markets than on a national basis, I guess, relative to kind of domestic demand, if you will.

Sure. Look, I think that you have to differentiate between actually foreign buyer and buyers with a foreign name, and I think what we're seeing, for instance, at the Great Park is we're seeing a high percentage of buyers who have names that come from the Greater Asia, China, Korea, India, Pakistan, and the Middle East. Those are not necessarily foreign buyers. Irvine has 40% of its population today is Asian. We're starting to see household formation out of that community, and because of the way the culture works, a lot of these families are helping their kids buy home so they can stay closer and the grandchildren gets close. So if you're asking me what percentage of buyers have names that come from that part of the world, I would say today we're probably about two thirds, but if you're asking me if those are foreign buyers as investors, we don’t have a lot of those.

Understood. Appreciate the color. And then I guess just one final quick one. Do you guys have any update for us on the Macerich JV? Obviously, plans changed a little bit recently. Just curious as to any kind of forward-looking guidance you can provide with us in regards to that project?

Sure, yes. I think last quarter we shared with all you that we are working with Macerich and we are rethinking that whole area. One of the things that we want to make sure of is that we are building a product for the future. And because of what retail world is right now, we don't want to go out and stay on autopilot and find ourselves building a product that might not be the right product. So we're spending a lot of time in planning and thinking about what we want to do over there. That's a very unique piece of land on the water in San Francisco, and you want to maximize its value by making sure that whatever we build over there is right. So we're spending a lot of time thinking through that. And I think that sometime within the coming probably quarter or two, we'll have more clarity on what happens over there. In the meanwhile, we are still going forward and putting the infrastructure needed. So it's not impacting the critical path per se, but we want to make sure that we think through it before it's closer to whatever we're going to go.

Our next question comes from the line of Michael Eisen with RBC Capital Markets.

Just wanted to start off on the commercial side of your business. You guys have put up two pretty consistent quarters. Just wanted to touch on it. If you can give us any update of occupancy rates from those properties, what you think of the run rate of the lease agreements coming in on a quarterly basis might be and how do you see this growing over time.

So we haven't given any update because we haven't had really any new leases signed up. On the Five Point Gateway, the one that we announced, which used to be -- referred to as the Broadcom project. And we have right now two buildings out of 1 million square feet. 650,000 square feet are already leased to Broadcom, and that's a long-term lease. And a building is going to be leased almost -- most of it is going to be leased to both Lennar and Five Point for our headquarters. And now we have a building that we are in the process of talking to potential tenants on. 77% of the total project is already leased up. So that's why we haven't given any update because we haven't had any real change. In terms of our plan, as we have showed with the market in the past, we will be building more of our commercial portfolio. We have -- beside the Macerich opportunity, which has been discussed, and the areas around Macerich, which are all income-producing, we also have a community at the Great Park. That's a commercial village that is in process with the city. So you should expect us to be updating you and talking about a growth of our segment -- or that segment of the business over the coming year or 2.

Got it. And then when thinking of the entitlement you guys are granted in San Francisco for additional commercial space there, do you guys have any view on what the timing of that development may look like? And as we think about that lapping in, would that be considered as something you'd want to put into Commercial segment? Or will that still specifically be in San Francisco results?

Well, no. I think that we right now, and Erik correct me if I'm wrong, we will be reporting on Commercial segment as one segment. So to be a separate segment, this will include all commercial in all of our communities. So as we start building up the commercial in San Francisco, it will be reported with the Commercial segment. In terms of the plans for that, obviously, that reflects the need for the commercial and office in San Francisco right now and the job-housing balance that we're trying to create within the community. The entitlements have a certain level or a great amount of fungibility to them in terms of where we put them, and that will all be informed through planning and right way of mixing the uses together. So we've got the approvals. We are going through the process of the planning, including Macerich and everything that surround us, and we will be utilizing those additional entitlements as the plans take shape.

Understood. And then just one more if I could. Just looking at the Great Park and some of the new products that you guys have launched in the last month or two, can you give any indication of sort of the pace on those new lots, whether there's any need to accelerate or fluctuate the current development plan you guys have to help meet builder demand?

No, there hasn't been. Actually, the way we actually deliver homesites is we deliver the homesites in a very optimized way where we like to have a certain amount of absorption that gives us the balance between speed and pricing. And because we've been selling homes, our builders have been selling homes, we've been able to measure the number of homesites to be delivered on a periodic basis and make sure that we do not oversupply the market or undersupply the market. So we have not seen a need for us to adjust the pace of delivery to the builders, which is driven by their pace of delivery to the consumers.

Our next question comes from the line of Alan Ratner with Zelman & Associates.

So I guess, Emile, just on that same topic for the Great Park, I think last quarter, you mentioned you were still planning or thinking about doing another round of from lot sales in the Great Park. You said maybe another 500 lots. Is that still on track?

Yes, it is. And we have seen a very consistent pace, and we are planning on having another delivery of homesites sometime towards the end of the year.

Okay. Great. And then just in terms of the cash distribution from the Great Park, I believe there's been a distribution made to the legacy holders. What's the current expectation for distributions to start through to Five Point?

Well, right now based on our schedule of delivery of homesites to builders and therefore find that legacy, we're probably looking at the first quarter or sometime in 2020 for the first distribution. That could go up or down based on our decision as to whether we want to accelerate or decelerate delivery of homesites to builders.

Is it triggered by like once you reach a certain milestone of how many lots have been sold? Can you talk a little bit about how we should think about both the magnitude of that?

No, it's actually a certain amount of cash that is a priority distribution to the legacy. Once we hit that point, then the distribution will go pari passu to Five Point and the other partners. And we are right now about 200 and...

210.

210 away from such point that out of the 560...

Approximately $560 million.

$560 million was the priority distribution amount and we're down to 210.

Got it. Okay. That's helpful. And then just if I could squeeze in one more just on the development side. So if I look at just the inventory line item on your balance sheet, it's up about $120 million year-to-date. And it looks like your cash usage is in the ballpark, a similar amount. Presumably, that reflects both the Newhall and the San Francisco developments that's been underway since there haven't been really any offset on the revenue line. So is this a decent run rate to think about kind of quarterly or biannually what the cash expenditure should be? Or is it going to be much lumpier than we've seen over the past few quarters?

No. I think you should expect it to be pretty much consistent with that. We are now in full gear at Newhall and San Francisco. We also have a sort of like a smooth type of infrastructure. I say that with a caveat, but obviously, if we end up with some weather conditions and things like that, that might exhibit more lumpiness. But I think that's a good number to look at in terms of a run rate.

Okay. That's helpful. And then just if I can squeeze in one more just for an update on Newhall. I know there were a couple of groups, I think, that were not included in the settlement that you reached. It looks like they haven't really been a factor since things are progressing there. But is there any reason to believe that at some point they might be successful in stopping the process?

Well look, I'm not going to answer it from a legal point of view because the system still allows people to make attempts. And there have been a couple of attempts made, and we beat in court. But we are extremely confident with the fact that we are now in an uninterrupted process. We have moved so far 15 million cubic yards. And we are -- as I said, we are really moving towards the delivery. So within the hallways of Five Point, we are very confident that we are up and running right now.

Our next question comes from the line of Stephen Kim with Evercore.

Yes, a few questions. Emile, first of all, I was wondering if you could talk about the testing at the naval base that's due to take place. Do you have any idea when we might get the results back from that? And do you have -- most likely and obviously hopefully, it comes back negative, but do you have a contingency plan in case it comes back positive?

Sure. First of all, as I said, Stephen, we already know that the Navy has put together a plan and send it to the regulators for review. And they're expecting some public comments sometime, I think, this week. Once they receive all the feedback, the Navy has basically informed to us, and they will talk about that publicly, that they will then publish the testing plan. We expect the testing to be probably several months and then whatever it takes to analyze the data. As I said before, Stephen, one is the Navy is responsible to deliver clean parcels to us. So assuming that there is anything that comes back in the testing, our expectation is that the Navy will go back and take care of those areas and make sure that they get the sign-off and we will not be taking any parcels down until that all parcels go through. In terms of the contingency plan, actually, the contingency plan was put in place a while ago, way before this issue of testing came up. And that is by shifting our focus to Candlestick. Candlestick was never a Navy base, and therefore, it's doesn't have any testing. It doesn't have any contamination, and it's not subject to any potential delays as a result of that. All our focus right now is on Candlestick. And candidly, I think for the coming probably 5 to 6 years, all development activities will be taking place in Candlestick. So as much as we're watching what happens, and we obviously want to make sure we get now clarity from the Navy in terms of timing of deliveries, we expect that our focus will be on Candlestick. And none of what's happening with the Navy will impact our business plan.

Great. That's good to hear. Shifting over to Newhall, you mentioned -- I guess first of all, I was curious as to whether or not the fires we're been hearing about have impacted you at all. And also I noticed in Newhall, you mentioned weather or rain a couple of times. And I was curious if you were thinking that there's any -- if there's anything to know about or just if you're thinking it's evolving with respect to weather-related issues in the long-term plan around Newhall.

First of all, the fires have not impacted us. They're not close to us. And the reason I mentioned weather is not because I have concerns about weather but because of the amount of movement of dirt right now and the amount of area and we actually will be posting some pictures hopefully maybe for the next call so at least people on the call will get a feel for the size and the magnitude of the land development operation. Because we have a lot of area opened up, I always have the caveat of weather because if it rains heavily for a week, that means you're going to have a delay of a week or 2 until it dries up so you can back and start working on land development. But we're not expecting any of the delays. The fires have not impacted us. And I am very optimistic that we are going to go through next year and deliver homesites and Newhall will be really supplying a lot of well-needed supply of housing in L.A. County.

Okay. That's helpful. That's great. And then also with respect to an earlier question, I think you were sort of holding off giving a number around what kind of deliveries you think you're going to get at the end of next year for Mission Village. But in the past, you've given a range of, I think, 500, maybe 1,000 or something. And today, you sort of threw out 1,000, 1,500. I know you weren't endorsing that number, but I guess should we at least take away from your comments that it is -- your view is that you probably will not have fewer than the 500 you had talked about previously?

Yes. I don't expect to have any -- less than the 500, as I said, assuming we don't end up with a surprising season, a rainy season that might delay some of the infrastructure. But we don't expect less than that. And again, Stephen, when you look at land development, I know we keep on talking about reporting within periods of quarters and years. In land development, we could actually be delivering a certain number of homesites by the end of 2018 or '19, but then a quarter or 2 later, we might deliver a few hundred homesites. So it's going to be within a certain period, but if you're trying to create a cut-off of the year-end, it's going to be a few hundred.

Yes. Okay. And then in Great Park, I think the numbers that we were looking at suggested that the 536 sites you sold were at about 310 a lot. Was curious as to, first of all, if that number is right. And then was -- what was the mix of attached versus detached homes that drove that?

Well, Lynn is going to look that up. It was a mixture of attached and detached. But as you can tell from the price per acre of the $500 million price per acre, it's not a big area from an acreage point of view, when you look at it in terms of thinking 533. So it's a higher-density product. Again, it goes back to answering the question of affordability. But Lynn, do you have a breakdown? Why don't we keep on going? We will look up the answer in a second.

Yes. And also in Great Park, I think in our numbers, we've been assuming that there was going to be another sale later this year, roughly equivalent the size from a lot prospective. Is that kind of what you're still thinking?

Yes, that's what we're thinking. And so we have -- here's the breakdown. I'm going to give to you product type just because sometimes people characterize certain products as attached, sometimes characterize them as detached. So we have one product that's an 11-plex, and we have 12 o-town. We have duplexes, triplexes and townhomes and then 8-plex. Does that help you?

Yes, definitely, very high density. That's kind of -- and then the sale later this year, should we be thinking that, that will be a little bit more single-family detached? Or would it be a similar kind of mixture?

Yes, the answer to -- before I go -- let me just give you another maybe way to look at what you were asking for before I handle that question. Our density goes from about, call it, 13 to an acre to 32 to an acre on the homesite that we sold before. The answer to the question is that's what we do. We monitor right now what the sales base is of the builders and we try to dovetail a product type to a product that's setting out. So I think it's going to be a mixture, but it will be all dependent on which of the product types are setting out, and that's what we bring to the market.

Our next question comes from the line of Michael Rehaut with JPMorgan.

This is Neal BasuMullick on for Mike. I guess at a high level, maybe can you talk a bit about some of the opportunities you might have identified or finding attractive, maybe early stage outside of your current portfolio?

We haven't announced anything, so I'm not going to talk about anything we have not announced yet. But I can tell you that we are in process of a couple of opportunities where, as we said before, our new opportunities will come from people who will approach us to partner with them for redevelopment and repurposing of space. And I can tell you that there is a couple of those type of opportunities we're looking at, but I'm not in a position to discuss them yet. One of them has been -- we haven't spoken about it, but Cal State Pomona has announced that they have picked us to be their potential developer. We are right now in an exclusive negotiating process with them to develop a parcel they own next to the campus, which will have residential as well as commercial and it will have student housing. And we view that as a great opportunity. And we view it as, again, a big statement in terms of a university picking us to be their selected developer on a parcel they own. So those are the type of opportunities, I think, you're going to hear us talk about.

Okay. That makes sense. And I guess given the profit sharing you're doing with the builders and your comments earlier on pricing, I guess what's the latest you're hearing from builders on the cost side?

Well, I've been in this business for 35 years. Builders always whine about cost. So this is not new. You have to add some level of difficulty, right? Look, it's not a secret that we're hearing from builders that they're starting to see a lot of pressure on the cost side and that they're trying to pull through all type of processes on that. One of the things that I can tell you is what worked well for us with the builders, and I actually was having a discussion with one of the builders about that. It's because we have an ability to provide builders with a longer runway of homesites to be sold to them over several years as they go from one product to another. The feedback I'm getting from some of the builders is that's enabling them to negotiate a better price structure because it's not about a short-term contract on one neighborhood, but rather it's a commitment to a longer-term process. And that's really where the relationship with the builders helps more.

Our next question comes from the line of Scott Schrier with Citigroup.

Just wanted to ask one question and a little bit of a follow-up on the cost you were talking about but more on the commercial side. I'm curious what you're seeing in the market and how you're thinking about your development from a yield on cost perspective, taking into account your potential to get the NOI that you want to get on some of the investments versus what you're going to have to pay for. So if you can just put some parameters around how you think about yield on cost and the attractiveness of the commercial assets at this time.

So the way we -- okay. If I'm going to give you a general answer, it will be 2% of our cap rate is what we usually target. But we own the land that we're going to be building on, so there is also that factor that we have to think of in terms of how do we cost the land to the commercial entity. Second thing is we look at commercial not only as a stand-alone performer but as a value-add creator for a larger masterplan. So when we look at a commercial opportunity, we're benefiting from both, getting the right targets of return on a standalone but also what that amenity or that commercial use might do to creating a premium for the balance of the homesites that we're selling. So we tend to look at our commercial approach a little bit different than someone who is just looking at it as one at a time because of that. Just to refresh your memory on the Broadcom opportunity, as much as we can look at the standalone return of the -- what we paid versus the leases we get and what that return looks like, we also captured back entitlements that we took back to the Great Park Neighborhood that could be converted to as much as 1,000 homes if we were to go residential. So there's these type of opportunities that we look at that might actually not be evident in a yield, but they add a huge value for us.

Our next question comes from the line of Stephen East with Wells Fargo.

This is Paul on for Stephen again. I was wondering if you could add some color on what you're seeing with respect to horizontal development inflation. And then also given your lack of development experience at Newhall, with the work done to date, how does that compare with your original budget?

Sure. So let me just start maybe with the end. I mean, we might not have been in land development for a while at Newhall, but we have a lot of experience developing up there -- the company developed all of city of Valencia and we developed Stevenson Ranch. So we have a lot of expertise in terms of what to expect in land development. But more importantly, to answer your about inflation, because of the nature of our development because we now at Newhall, for example, have a commitment to grading contract that is a long-term commitment, we have the luxury of negotiating price structures that are long-term price structures that somebody else might not be able to get. So we have not really seen any price pressure or cost pressure in terms of land development. We usually factor in your typical cost of living escalation, but we haven't seen any real surge in cost on land development, as I said, because of our dominance in the marketplace we're in.

There are no further questions in the queue. I'd like to hand the call back to management for closing comments.

Thanks, everybody, for joining us today this afternoon. We look forward to speaking with you on the third quarter conference call. Have a great afternoon.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.