# Five Point Holdings, LLC: Form 10-Q for the period ended Sep 30, 2020

- Company: [Five Point Holdings, LLC](/companies/fph.md) (CIK 1574197)
- Form: 10-Q
- Filed: 2020-11-09
- Accepted by EDGAR: Nov 6, 2020, 18:01 ET
- Period: 2020-09-30
- Accession: 0001574197-20-000028
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1574197/000157419720000028/fph-20200930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1574197/000157419720000028/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-07-01 to 2020-09-30 | $8.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2020-01-01 to 2020-09-30 | $41.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Selling, general and administrative | 3 months, 2020-07-01 to 2020-09-30 | $17.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2020-01-01 to 2020-09-30 | $58.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Income tax | 3 months, 2020-07-01 to 2020-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2020-01-01 to 2020-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-07-01 to 2020-09-30 | $17.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2020-01-01 to 2020-09-30 | −$1.2m | us-gaap:NetIncomeLoss |
| Operating cash flow | 9 months, 2020-01-01 to 2020-09-30 | −$115.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2020-01-01 to 2020-09-30 | $2.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2020-09-30 | $270.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2020-09-30 | $2.96bn | us-gaap:Assets |
| Total liabilities | at 2020-09-30 | $1.06bn | us-gaap:Liabilities |
| Shareholders' equity | at 2020-09-30 | $1.88bn | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 62,040 characters.

### Forward-Looking Statements

*The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read in conjunction with our condensed consolidated financial statements and related notes included under Part I, Item 1 of this report and our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. “Us,” “we,” and “our” refer to Five Point Holdings, LLC, together with its consolidated subsidiaries. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as supplemented by Part II, Item 1A in this quarterly report. Actual results could differ materially from those set forth in any forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements.”*

### Overview

We conduct all of our business in or through our operating company, Five Point Operating Company, LP (the “operating company”). We are, through a wholly owned subsidiary, the sole managing general partner and owned, as of September 30, 2020, approximately 62.5% of the operating company. The operating company directly or indirectly owns equity interests in:

- Five Point Land, LLC (“FPL”), which owns The Newhall Land & Farming Company, a California limited partnership, the entity that is developing Valencia (formerly known as Newhall Ranch), our community in northern Los Angeles County, California;
- The Shipyard Communities, LLC (the “San Francisco Venture”), which is developing Candlestick and The San Francisco Shipyard, our communities in the City of San Francisco, California;
- Heritage Fields LLC (the “Great Park Venture”), which is developing Great Park Neighborhoods, our community in Orange County, California;
- Five Point Office Venture Holdings I, LLC (the “Gateway Commercial Venture”), which owns portions of the Five Point Gateway Campus, our commercial office and medical campus located within the Great Park Neighborhoods; and
- Five Point Communities, LP and Five Point Communities Management, Inc. (together, the “management company”), which provide development and property management services for the Great Park Neighborhoods and the Five Point Gateway Campus.

The operating company consolidates and controls the management of all of these entities except for the Great Park Venture and the Gateway Commercial Venture. The operating company owns a 37.5% percentage interest in the Great Park Venture and a 75% interest in the Gateway Commercial Venture and accounts for its interest in both using the equity method.

### Operational Highlights

In August 2020, the Gateway Commercial Venture closed on the sale of two buildings at the Five Point Gateway Campus, comprising a total of approximately 660,000 square feet of research and development space currently leased to one tenant, a subsidiary of Broadcom Inc., for a purchase price of $355.0 million. The sale of the buildings resulted in a gain to the Gateway Commercial Venture of approximately $74.8 million, net of transaction costs. After this sale, the Gateway Commercial Venture retains ownership of one building and approximately 50 acres of commercial land with additional development rights at the campus. Additionally, the Gateway Commercial Venture made a debt payment of $245.0 million to its lender and made total distributions of approximately $107.0 million to its members, of which approximately $80.3 million was distributed to us.

In response to the coronavirus (COVID-19) pandemic, we have taken immediate steps to protect the health and well-being of our associates and to preserve the financial strength of the Company. Our associates are still working remotely with access to necessary systems and resources to ensure business continuity. The recent asset sales at the Five Point Gateway Campus have bolstered our liquidity by generating aggregate cash distributions paid to us of $136.5 million since May 2020. Despite continued economic volatility, homebuilding is a bright spot due to consumer demand for more space and a historically favorable mortgage environment. At the Great Park Neighborhoods, our guest builders are realizing consistent rates of home sales. In Valencia, our guest builders are preparing for the first home sales, which are expected to close in the first half of 2021. We are optimistic that favorable market conditions will continue for our guest builders and have therefore resumed regular development activities. As we monitor recent surges in COVID-19 cases in California and other states across the nation, we will manage our development activities and expenditures to coincide with projected demand for homesites by our guest builders.

### Results of Operations

The timing of our land sale revenues is influenced by several factors, including the sequencing of the planning and development process and market conditions at our communities. As a result, we have historically experienced, and expect to continue to experience, variability in results of operations between comparable periods.

The following table summarizes our consolidated historical results of operations for the three and nine months ended September 30, 2020 and 2019.

*(in thousands)*

| Statement of Operations Data Revenues | Three Months Ended September 30, 2020 | 2019 | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Land sales | $42 | $9 | $17,076 | $74 |
| Land sales—related party | 2 | 229 | 14 | 695 |
| Management services—related party | 7,999 | 11,458 | 22,557 | 33,689 |
| Operating properties | 334 | 318 | 2,257 | 3,016 |
| Total revenues | 8,377 | 12,014 | 41,904 | 37,474 |
| Costs and expenses |  |  |  |  |
| Land sales | — | — | 11,861 | — |
| Management services | 6,120 | 7,699 | 16,587 | 22,794 |
| Operating properties | 764 | 1,388 | 4,408 | 4,488 |
| Selling, general, and administrative | 17,656 | 25,863 | 58,594 | 77,629 |
| Total costs and expenses | 24,540 | 34,950 | 91,450 | 104,911 |
| Other income |  |  |  |  |
| Interest income | 71 | 1,724 | 1,303 | 6,494 |
| Gain on settlement of contingent consideration—related party | — | — | — | 64,870 |
| Miscellaneous | 91 | 7 | 267 | 26 |
| Total other income | 162 | 1,731 | 1,570 | 71,390 |
| Equity in earnings (loss) from unconsolidated entities | 52,423 | (1,750) | 45,417 | 4,463 |
| Income (loss) before income tax (provision) benefit | 36,422 | (22,955) | (2,559) | 8,416 |
| Income tax (provision) benefit | — | — | — | (1,266) |
| Net income (loss) | 36,422 | (22,955) | (2,559) | 7,150 |
| Less net income (loss) attributable to noncontrolling interests | 19,458 | (12,292) | (1,349) | 4,517 |
| Net income (loss) attributable to the company | $16,964 | $(10,663) | $(1,210) | $2,633 |

#### Three Months Ended September 30, 2020 and 2019

**Revenues.** Revenues decreased by $3.6 million, or 30.3%, to $8.4 million for the three months ended September 30, 2020, from $12.0 million for the three months ended September 30, 2019. The decrease in revenues was primarily attributable to a decrease in management services revenue at our Great Park segment.

**Cost of management services.** Cost of management services decreased by $1.6 million, or 20.5%, to $6.1 million for the three months ended September 30, 2020, from $7.7 million for the three months ended September 30, 2019. The decrease was primarily due to less intangible asset amortization expense at our Great Park segment.

**Selling, general, and administrative.** Selling, general, and administrative expenses decreased by $8.2 million, or 31.7%, to $17.7 million for the three months ended September 30, 2020, from $25.9 million for the three months ended September 30, 2019. The decrease was mainly attributable to a decrease in employee related expenses.

**Equity in earnings (loss) from unconsolidated entities.** Equity in earnings from unconsolidated entities increased to $52.4 million for the three months ended September 30, 2020, from a loss of $1.8 million for the three months ended September 30, 2019. The increase was primarily due to the gain from the sale of two buildings at our Commercial segment during the three months ended September 30, 2020.

**Income taxes.** Pre-tax income of $36.4 million for the three months ended September 30, 2020 resulted in no tax provision (after application of a decrease in the Company’s valuation allowance of $5.0 million). We assessed the realization of the net deferred tax asset and the need for a valuation allowance and determined that at September 30, 2020, it is more likely than not that the net deferred tax asset is not realizable and results in a net deferred tax liability after application of the valuation allowance. Pre-tax loss for the three months ended September 30, 2019 of $23.0 million resulted in no tax provision (after application of an increase in the Company’s valuation allowance of $2.8 million). Our effective tax rate, before changes in valuation allowance, increased for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily due to the lack of deductibility of certain executive compensation.

#### Nine Months Ended September 30, 2020 and 2019

**Revenues.** Revenues increased by $4.4 million, or 11.8%, to $41.9 million for the nine months ended September 30, 2020, from $37.5 million for the nine months ended September 30, 2019. The increase in revenues was primarily due to land sales at our Valencia segment (formerly Newhall) during the nine months ended September 30, 2020. The increase is offset by a decrease in management services revenue at our Great Park segment.

**Cost of land sales.** The cost of land sales for the nine months ended September 30, 2020 is due to land sales at our Valencia segment.

**Cost of management services.** Cost of management services decreased by $6.2 million, or 27.2%, to $16.6 million for the nine months ended September 30, 2020, from $22.8 million for the nine months ended September 30, 2019. The decrease was primarily due to less intangible asset amortization expense at our Great Park segment.

**Selling, general, and administrative.** Selling, general, and administrative expenses decreased by $19.0 million, or 24.5%, to $58.6 million for the nine months ended September 30, 2020, from $77.6 million for the nine months ended September 30, 2019. The decrease was mainly attributable to a decrease in employee related expenses.

**Equity in earnings from unconsolidated entities.** Equity in earnings from unconsolidated entities increased by $41.0 million, to $45.4 million for the nine months ended September 30, 2020, from $4.5 million for the nine months ended September 30, 2019. The increase was primarily due to an increase in earnings from the Gateway Commercial Venture due to gains from the sale of land and three buildings during the nine months ended September 30, 2020. The increase is offset by variability in land sale activity at the Great Park Venture during the nine months ended September 30, 2020 compared to the same period in 2019. At the end of the first quarter of 2020, we recognized an other-than-temporary impairment of $26.9 million attributed to our investment in the Great Park Venture. The impairment was primarily a result of expected delays in both the timing of land sales to builders and distributions to us causing a decline in the fair value of our investment in the Great Park Venture. In determining that the impairment was other-than-temporary, we concluded that it was uncertain if a near term recovery of value that was lost as a result of delays to expected land sales from the impacts of the COVID-19 pandemic would occur. See Note 4 to our condensed consolidated financial statements included under Part I, Item 1 of this report.

**Income taxes.** Pre-tax loss of $2.6 million for the nine months ended September 30, 2020 resulted in no tax provision (after application of a decrease in the Company’s valuation allowance of $0.3 million). We assessed the realization of the net deferred tax asset and the need for a valuation allowance and determined that at September 30, 2020, it is more likely than not that the net deferred tax asset is not realizable and results in a net deferred tax liability after application of the valuation allowance. Pre-tax income for the nine months ended September 30, 2019 of $8.4 million resulted in a tax provision of $1.3 million. The tax provision was the result of a $2.0 million decrease to our deferred tax asset offset by a $0.7 million decrease to our deferred tax asset valuation allowance. Our effective tax rate, before changes in valuation allowance, increased for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to the lack of deductibility of certain executive compensation.

### Segment Results and Financial Information

Our four reportable operating segments are Valencia (formerly Newhall), San Francisco, Great Park and Commercial:

- Our Valencia segment includes operating results for the Valencia community and agricultural operations in Los Angeles and Ventura Counties, California.
- Our San Francisco segment includes operating results for the Candlestick and The San Francisco Shipyard communities, as well as results attributable to the development management services that we provided to affiliates of Lennar Corporation (“Lennar”) in the San Francisco Bay Area. Our management agreement with Lennar with respect to the Concord community was terminated in early 2020.
- Our Great Park segment includes operating results for the Great Park Neighborhoods community and development management services provided by the management company for the Great Park Venture.
- Our Commercial segment includes Gateway Commercial Venture’s operating results from its portion of ownership and operation of the Five Point Gateway Campus and property management services provided by the management company for the Gateway Commercial Venture.

### Valencia Segment (formerly Newhall)

Our Valencia property (formerly known as Newhall Ranch) consists of approximately 15,000 acres in northern Los Angeles County and is designed to include approximately 21,500 homesites and approximately 11.5 million square feet of commercial space. Valencia is the continuation of our master-planned community where already today approximately 20,000 households reside and approximately 60,000 people work. In 2019, we entered into purchase and sale agreements to sell 781 homesites in the first development area at the community, known as Mission Village. We closed on 711 of the homesites in 2019 and the balance closed in May 2020. Mission Village is approved for up to 4,055 homesites and approximately 1.6 million square feet of commercial development.

The following table summarizes the results of operations of our Valencia segment for the three and nine months ended September 30, 2020 and 2019.

*(in thousands)*

| Statement of Operations Data Revenues | Three Months Ended September 30, 2020 | 2019 | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Land sales | $42 | $9 | $17,076 | $74 |
| Land sales—related party | 2 | 8 | 14 | 31 |
| Operating properties | 196 | 134 | 1,807 | 2,481 |
| Total revenues | 240 | 151 | 18,897 | 2,586 |
| Costs and expenses |  |  |  |  |
| Land sales | — | — | 11,861 | — |
| Operating properties | 764 | 1,388 | 4,408 | 4,488 |
| Selling, general, and administrative | 2,798 | 3,663 | 9,244 | 11,364 |
| Total costs and expenses | 3,562 | 5,051 | 25,513 | 15,852 |
| Other income | 91 | 8 | 268 | 29 |
| Segment loss | $(3,231) | $(4,892) | $(6,348) | $(13,237) |

#### Three Months Ended September 30, 2020 and 2019

**Selling, general, and administrative.** Selling, general, and administrative expenses decreased by $0.9 million, or 23.6%, to $2.8 million for the three months ended September 30, 2020, from $3.7 million for the three months ended September 30, 2019. The decrease was mainly attributable to a decrease in employee related expenses, offset by an increase in community related selling and marketing expenses as we begin to increase master marketing activities in anticipation of expected builder openings at Mission Village in the first half of 2021.

#### Nine Months Ended September 30, 2020 and 2019

**Revenues.** Revenues increased by $16.3 million to $18.9 million for the nine months ended September 30, 2020, from $2.6 million for the nine months ended September 30, 2019. The increase was primarily attributable to the recognition of revenue from the sale of land entitled for an aggregate of 70 homesites on approximately seven acres during the nine months ended September 30, 2020 compared to no land sales during the same period in 2019. The base purchase price was $16.6 million. We also recognized $0.4 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that we expect to be entitled to receive.

**Cost of land sales.** Cost of land sales attributed to land sale activity for the nine months ended September 30, 2020 was $11.9 million, or 69.4% of total land sales revenues during the period. The cost of land sales for parcels sold during a period includes both actual and estimated future capitalized costs allocated based upon relative sales values. Since this method requires us to estimate the expected sales prices for the entire project, the profit margin on subsequent parcels sold will be affected by both changes in the estimated total revenues, as well as any changes in the estimated total cost of the project.

**Selling, general, and administrative.** Selling, general, and administrative expenses decreased by $2.1 million, or 18.7%, to $9.2 million for the nine months ended September 30, 2020, from $11.4 million for the nine months ended September 30, 2019. The decrease was mainly attributable to a decrease in employee related expenses, offset by an increase in community related selling and marketing expenses as we begin to increase master marketing activities in anticipation of expected builder openings at Mission Village in the first half of 2021.

### San Francisco Segment

Located almost equidistant between downtown San Francisco and the San Francisco International Airport, Candlestick and The San Francisco Shipyard consist of approximately 800 acres of bayfront property in the City of San Francisco. Candlestick and The San Francisco Shipyard are designed to include approximately 12,000 homesites and approximately 6.3 million square feet of commercial space.

On May 2, 2016, the San Francisco Venture transferred to a joint venture (“CPHP”) between an affiliate of Lennar and an affiliate of Castlelake L.P. (“Castlelake”) certain assets and liabilities of the San Francisco Venture, including property within The San Francisco Shipyard known as the Phase 1 Land (the “Separation Transaction”). CPHP is responsible for current and future residential construction on the Phase 1 Land. We are not entitled to any of the proceeds from future sales of homes on the Phase 1 Land. CPHP was also transferred the ownership interest in a joint venture (the “Mall Venture”) formed with affiliates of The Macerich Company (“Macerich”) that intended to construct an urban retail outlet shopping district (the “Retail Project”) at Candlestick. Following the Separation Transaction, we were obligated to complete certain development activities and convey the parcels of property to the Mall Venture upon which the Retail Project was to be developed. In early 2019, following discussions with the members of the Mall Venture, we and the members of the Mall Venture decided not to proceed with the Retail Project. As part of the termination of the Retail Project, we were released from our obligation to convey parcels of property on which the Retail Project was intended to be developed by the Mall Venture. We were also released from certain development obligations. As a result of the termination of the Retail Project, we recognized a gain of $64.9 million in early 2019, representing the settlement of the contingent consideration pertaining to the development obligations and relief from the conveyance of these parcels. Additionally, we repaid Macerich a $65.1 million obligation related to a promissory note in the same amount, plus $11.1 million of accrued interest associated with the promissory note. The San Francisco Venture also issued an aggregate of 436,498 of its Class A Units (while we concurrently issued 436,498 of our Class B common shares) to affiliates of Lennar and Castlelake and concurrently received a contribution of $5.5 million from affiliates of Lennar and Castlelake.

In October 2019, we received approval from the City of San Francisco on a revised development plan for the first phase of Candlestick that is currently planned to include approximately 750,000 square feet of office space, 1,600 homes, and 300,000 square feet of lifestyle amenities centered around retail and entertainment. As currently planned, Candlestick ultimately is expected to include approximately 7,000 homes.

Our development at Candlestick and The San Francisco Shipyard is not subject San Francisco’s Proposition M growth control measure, which imposes annual limitations on office development and is applicable to all other developers with projects in the city. This means the full amount of permitted commercial square footage at Candlestick and The San Francisco Shipyard can be constructed as we determine, including all at once, even though Proposition M may delay new office developments elsewhere in San Francisco. In 2018, our disposition and development agreement with the City of San Francisco was amended to increase the total amount of commercial use at Candlestick and The San Francisco Shipyard by over two million square feet, most of which we anticipate will be for office use, and increases our total commercial space to approximately 6.3 million square feet.

At The San Francisco Shipyard, approximately 408 acres are still owned by the U.S. Navy and will not be conveyed to us until the U.S. Navy satisfactorily completes its finding of suitability to transfer, or “FOST,” process, which involves multiple levels of environmental and governmental investigation, analysis, review, comment and approval. Based on our discussions with the U.S. Navy, we had previously expected the U.S. Navy to deliver this property between 2019 and 2022. However, allegations that Tetra Tech, Inc. and Tetra Tech EC, Inc (collectively, “Tetra Tech”), a contractor hired by the U.S. Navy, misrepresented sampling results at The San Francisco Shipyard have resulted in data reevaluation, governmental investigations, criminal proceedings, lawsuits, and a determination by the U.S. Navy and other regulatory agencies to undertake additional sampling. As part of the 2018 Congressional spending bill, the U.S. Department of Defense allocated $36.0 million to help fund resampling efforts at The San Francisco Shipyard. An additional $60.4 million to fund resampling efforts was approved as part of a 2019 military construction spending bill. These activities have delayed the remaining land transfers from the U.S. Navy and could lead to additional legal claims or government investigations, all of which could in turn further delay or impede our future development of such parcels. Our development plans were designed with the flexibility to adjust for potential land transfer delays, and we have the ability to shift the phasing of our development activities to account for potential delays caused by U.S. Navy retesting, but there can be no assurance that these matters and other related matters that may arise in the future will not materially impact our development plans.

We have been, and may in the future be, named as a defendant in lawsuits seeking damages and other relief arising out of alleged contamination at The San Francisco Shipyard and Tetra Tech’s alleged misrepresentations of related sampling work. See Note 12 to our condensed consolidated financial statements included under Part I, Item 1 of this report. Given the preliminary nature of the claims to date, we cannot predict the outcome of these matters.

The following table summarizes the results of operations of our San Francisco segment for the three and nine months ended September 30, 2020 and 2019.

*(in thousands)*

| Statement of Operations Data Revenues | Three Months Ended September 30, 2020 | 2019 | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Land sales—related party | $— | $221 | $— | $664 |
| Operating property | 138 | 184 | 450 | 535 |
| Management services—related party | — | 545 | 835 | 1,816 |
| Total revenues | 138 | 950 | 1,285 | 3,015 |
| Costs and expenses |  |  |  |  |
| Management services | — | 226 | 488 | 855 |
| Selling, general, and administrative | 1,967 | 4,386 | 8,184 | 14,083 |
| Total costs and expenses | 1,967 | 4,612 | 8,672 | 14,938 |
| Other income—gain on settlement of contingent consideration, related party | — | — | — | 64,870 |
| Segment (loss) income | $(1,829) | $(3,662) | $(7,387) | $52,947 |

#### Three Months Ended September 30, 2020 and 2019

**Selling, general, and administrative.** Selling, general, and administrative expenses decreased by $2.4 million, or 55.2%, to $2.0 million for the three months ended September 30, 2020, from $4.4 million for the three months ended September 30, 2019. The decrease was mainly attributable to a decrease in employee related expenses.

#### Nine Months Ended September 30, 2020 and 2019

**Management services—related party revenues.** Revenues decreased by $1.0 million to $0.8 million for the nine months ended September 30, 2020, from $1.8 million for the nine months ended September 30, 2019. The decrease was primarily attributable to the termination of our management agreement with Lennar with respect to the Concord community in early 2020.

**Selling, general, and administrative.** Selling, general, and administrative expenses decreased by $5.9 million, or 41.9%, to $8.2 million for the nine months ended September 30, 2020, from $14.1 million for the nine months ended September 30, 2019. The decrease was mainly attributable to a decrease in employee related expenses.

**Other Income.** In early 2019, we and the members of the Mall Venture determined not to proceed with the Retail Project, and we were released from obligations to convey parcels of property on which the Retail Project was intended to be developed by the Mall Venture. As a result of the relief of these obligations, we recognized a gain of $64.9 million during the nine months ended September 30, 2019.

### Great Park Segment

We have a 37.5% percentage interest in the Great Park Venture, and we account for our investment using the equity method of accounting. We have a controlling interest in the management company, an entity which performs development management services at Great Park Neighborhoods. We do not include the Great Park Venture as a consolidated subsidiary in our consolidated financial statements. However, because of the relationship between the management company and the Great Park Venture, we assess our investment in the Great Park Venture based on the financial information for the Great Park Venture in its entirety, and not just our equity interest in it. As a result, our Great Park segment consists of the operations of both the Great Park Venture and the development management services provided by the management company at the Great Park Venture.

Great Park Neighborhoods consists of approximately 2,100 acres in Orange County and is being built around the approximately 1,300 acre Orange County Great Park, a metropolitan public park that is under construction. Great Park Neighborhoods is designed to include approximately 10,500 homesites and approximately 4.9 million square feet of commercial space.

Interests in the Great Park Venture are either “percentage interests” or “legacy interests.” Holders of the legacy interests are entitled to receive priority distributions in an amount up to $565.0 million, and holders of percentage interests are entitled to all other distributions. In early 2020, the Great Park Venture made a distribution of $76.3 million to the holders of legacy interests, reducing the remaining aggregate distributions to the holders of legacy interests to approximately $134.0 million. Of the remaining $134.0 million, the first $45.0 million will be paid to the holders of legacy interests prior to the commencement of distributions to the holders of percentage interests. See Note 4 to our condensed consolidated financial statements included under Part I, Item 1 of this report for additional discussion of distribution priorities at the Great Park Venture.

The following table summarizes the results of operations of our Great Park segment for the three and nine months ended September 30, 2020 and 2019.

*(in thousands)*

| Statement of Operations Data Revenues | Three Months Ended September 30, 2020 | 2019 | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Land sales | $141 | $36,198 | $21,962 | $98,743 |
| Land sales—related party | 87 | 2,438 | 1,092 | 132,473 |
| Management services—related party | 7,895 | 10,814 | 21,424 | 31,647 |
| Total revenues | 8,123 | 49,450 | 44,478 | 262,863 |
| Costs and expenses |  |  |  |  |
| Land sales | — | 24,518 | 15,304 | 153,486 |
| Management services | 6,120 | 7,473 | 16,099 | 21,939 |
| Selling, general, and administrative | 8,840 | 9,680 | 29,572 | 26,751 |
| Management fees—related party | 3,440 | 7,825 | 7,633 | 24,445 |
| Total costs and expenses | 18,400 | 49,496 | 68,608 | 226,621 |
| Interest income | 84 | 1,016 | 1,210 | 2,671 |
| Segment (loss) income | $(10,193) | $970 | $(22,920) | $38,913 |

#### Three Months Ended September 30, 2020 and 2019

**Revenues.** Revenues decreased by $41.3 million to $8.1 million for the three months ended September 30, 2020, from $49.5 million for the three months ended September 30, 2019. The decrease was primarily attributable to the recognition of revenue from the sale of land at the Great Park Neighborhoods entitled for an aggregate of 89 homesites on approximately five and a half acres during the three months ended September 30, 2019, for a base purchase price of $35.3 million, compared to no land sales during the same period in 2020. The Great Park Venture also recognized $0.8 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that it expects to be entitled to receive for the 2019 sales. During the three months ended September 30, 2020 and September 30, 2019, segment revenues also included changes in estimates of variable land sale consideration, including profit participation, from those amounts previously recorded by the Great Park Venture and revenues generated by the management company from development management services provided to the Great Park Venture. The management company receives a base management fee, reimbursement for certain defined project team costs and the right to receive certain variable incentive compensation. Reduction in management services related party revenue was mainly attributable to impacts of COVID-19 on the estimation of our variable consideration pertaining to the incentive compensation.

**Cost of land sales.** Cost of land sales attributed to land sale activity during the three months ended September 30, 2019 was $24.5 million, or 63.5% of total land sales revenues during the period. The cost of land sales for parcels sold during a period includes both actual and estimated future capitalized costs allocated based upon relative sales values. Since this method requires the Great Park Venture to estimate the expected sales prices for the entire project, the profit margin on subsequent parcels sold will be affected by both changes in the estimated total revenues, as well as any changes in the estimated total cost of the project.

**Management services costs and expenses.** Included within management services costs and expenses are general and administrative costs and expenses incurred directly by the management company’s project team that is managing the development of the Great Park Neighborhoods. We also include amortization expense related to the intangible asset attributable to the incentive compensation provisions of the development management agreement with the Great Park Venture. Corporate and non-project team salaries and overhead are not allocated to management services costs and expenses or to our reportable segments and are reported in selling, general, and administrative costs in the condensed consolidated statements of operations. Management services costs and expenses decreased by $1.4 million, or 18.1%, to $6.1 million for the three months ended September 30, 2020, from $7.5 million for the three months ended September 30, 2019. The decrease was mainly attributable to decreased intangible asset amortization expense.

**Selling, general, and administrative.** Selling, general, and administrative expenses decreased by $0.8 million, or 8.7%, to $8.8 million for the three months ended September 30, 2020, from $9.7 million for the three months ended September 30, 2019. The decrease was mainly attributable to decreased property maintenance expenses.

**Management fees—related party.** Management fees decreased by $4.4 million, or 56.0%, to $3.4 million for the three months ended September 30, 2020, from $7.8 million for the three months ended September 30, 2019. Management fees incurred by the Great Park Venture are comprised of base development management fees and incentive compensation fees. In general, incentive compensation fees will be paid based on a percentage of distributions made to holders of the Great Park Venture’s percentage interests. When payments are deemed probable of being made, the Great Park Venture recognizes the expense ratably over the period services are expected to be provided. When estimates of the amount of incentive compensation probable of being paid change, the Great Park Venture records a cumulative adjustment in the period in which the estimate changes. In connection with evaluating the impacts of COVID-19, the Great Park Venture has reduced its estimate of the total amount of incentive compensation probable of being paid, resulting in a reduction in total management fee expense recognized.

#### Nine Months Ended September 30, 2020 and 2019

**Revenues.** Revenues decreased by $218.4 million to $44.5 million for the nine months ended September 30, 2020, from $262.9 million for the nine months ended September 30, 2019. The decrease was primarily attributable to the recognition of revenue from the sale of land at the Great Park Neighborhoods entitled for an aggregate of 35 homesites on approximately four acres during the nine months ended September 30, 2020 compared to the recognition of revenue from the sale of land entitled for an aggregate of 518 homesites on approximately 41 acres during the same period in 2019. Initial gross proceeds from the 2020 sale were $20.3 million, representing the base purchase price. The Great Park Venture also recognized $0.5 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that it expects to be entitled to receive. Initial gross proceeds from the 2019 sales were $217.5 million, representing the aggregate base purchase price. The Great Park Venture also recognized $5.1 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that it expects to be entitled to receive. During the nine months ended September 30, 2020 and September 30, 2019, segment revenues also included changes in estimates of variable land sale consideration, including profit participation, from those amounts previously recorded by the Great Park Venture and revenues generated by the management company from development management services provided to the Great Park Venture. The management company receives a base management fee, reimbursement for certain defined project team costs and the right to receive certain variable incentive compensation. Reduction in management services related party revenue was mainly attributable to impacts of COVID-19 on the estimation of our variable consideration pertaining to the incentive compensation.

**Cost of land sales.** Cost of land sales attributed to land sale activity during the nine months ended September 30, 2020 and 2019 were $15.3 million and $153.5 million, or 66.4% and 66.4% of total land sales revenues during the periods, respectively. The cost of land sales for parcels sold during a period includes both actual and estimated future capitalized costs allocated based upon relative sales values. Since this method requires the Great Park Venture to estimate the expected sales prices for the entire project, the profit margin on subsequent parcels sold will be affected by both changes in the estimated total revenues, as well as any changes in the estimated total cost of the project.

**Management services costs and expenses.** Management services costs and expenses decreased by $5.8 million, or 26.6%, to $16.1 million for the nine months ended September 30, 2020, from $21.9 million for the nine months ended September 30, 2019. The decrease was mainly attributable to decreased intangible asset amortization expense.

**Selling, general, and administrative.** Selling, general, and administrative expenses increased by $2.8 million, or 10.5%, to $29.6 million for the nine months ended September 30, 2020, from $26.8 million for the nine months ended September 30, 2019. The increase was mainly attributable to an increase in marketing fee expenses incurred at the Great Park Neighborhoods offset by a decrease in property maintenance expenses.

**Management fees—related party.** Management fees decreased by $16.8 million, or 68.8%, to $7.6 million for the three months ended September 30, 2020, from $24.4 million for the nine months ended September 30, 2019. Management fees incurred by the Great Park Venture are comprised of base development management fees and incentive compensation fees. In general, incentive compensation fees will be paid based on a percentage of distributions made to holders of the Great Park Venture’s percentage interests. When payments are deemed probable of being made, the Great Park Venture recognizes the expense ratably over the period services are expected to be provided. When estimates of the amount of incentive compensation probable of being paid change, the Great Park Venture records a cumulative adjustment in the period in which the estimate changes. In connection with evaluating the impacts of COVID-19, the Great Park Venture has reduced its estimate of the total amount of incentive compensation probable of being paid, resulting in a reduction in total management fee expense recognized.

The table below reconciles the Great Park segment results to the equity in (loss) earnings from our investment in the Great Park Venture that is reflected in the condensed consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019.

*(in thousands)*

|  | Three Months Ended September 30, 2020 | 2019 | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Segment net (loss) income from operations | $(10,193) | $970 | $(22,920) | $38,913 |
| Less net income of management company attributed to the Great Park segment | 1,775 | 3,340 | 5,325 | 9,708 |
| Net (loss) income of the Great Park Venture | (11,968) | (2,370) | (28,245) | 29,205 |
| The Company’s share of net (loss) income of the Great Park Venture | (4,488) | (889) | (10,592) | 10,952 |
| Basis difference accretion (amortization) | 293 | 199 | (1,204) | (3,694) |
| Other-than-temporary investment impairment | — | — | (26,851) | — |
| Equity in (loss) earnings from the Great Park Venture | $(4,195) | $(690) | $(38,647) | $7,258 |

42

### Commercial Segment

We have a 75% interest in the Gateway Commercial Venture that is held through a wholly owned subsidiary of the operating company, and we serve as the manager of the Gateway Commercial Venture. However, the manager’s authority is limited. Major decisions by the Gateway Commercial Venture generally require unanimous approval by an executive committee composed of two people designated by us and two people designated by another investor. Some decisions require approval by all of the members of the Gateway Commercial Venture. We do not include the Gateway Commercial Venture as a consolidated subsidiary in our consolidated financial statements. However, as a result of our 75% economic interest and our role as manager, we assess our investment in the Gateway Commercial Venture based on the financial information of the Gateway Commercial Venture in its entirety, and we include the Gateway Commercial Venture’s financial results within the Commercial segment. Additionally, the management company has been engaged by the Gateway Commercial Venture to provide property management services to the Five Point Gateway Campus. We include the management company’s results of operations related to these property management services within the Commercial segment.

The Five Point Gateway Campus is a commercial campus consisting of approximately 73 acres of land in the Great Park Neighborhoods acquired by the Gateway Commercial Venture in 2017. The Five Point Gateway Campus currently includes approximately one million square feet planned for research and development, medical and office space in four buildings, which are designed to accommodate thousands of employees. A subsidiary of Broadcom Inc. (“Broadcom”) is the largest tenant, leasing two buildings comprising approximately 660,000 square feet of research and development space pursuant to a 20-year triple net lease. In August 2020, the Gateway Commercial Venture closed on the sale of these two buildings to a real estate management company and operator. In May 2020, the Gateway Commercial Venture closed on the sale of one building including approximately 11 acres of land within the campus to City of Hope, which intends to develop and operate a comprehensive cancer care center and build a future micro hospital.

We and Lennar separately lease approximately 135,000 aggregate square feet of the fourth building, which remains owned by the Gateway Commercial Venture. In addition to the fourth building, the Gateway Commercial Venture owns approximately 50 acres of commercial land with additional development rights at the campus.

The following table summarizes the results of operations of our Commercial segment for the three and nine months ended September 30, 2020 and 2019.

*(in thousands)*

| Statement of Operations Data Revenues | Three Months Ended September 30, 2020 | 2019 | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Rental and related income | $2,935 | $6,388 | $15,797 | $19,492 |
| Rental and related income—related party | 2,224 | 2,186 | 6,344 | 6,216 |
| Property management services—related party | 104 | 99 | 298 | 226 |
| Total revenues | 5,263 | 8,673 | 22,439 | 25,934 |
| Costs and expenses |  |  |  |  |
| Rental operating expenses | 1,275 | 1,946 | 4,530 | 5,094 |
| Interest | 1,605 | 4,249 | 8,547 | 12,938 |
| Depreciation | 972 | 2,745 | 6,327 | 8,229 |
| Amortization | 23 | 1,032 | 2,100 | 3,090 |
| Other expenses | 640 | 14 | 812 | 83 |
| Total costs and expenses | 4,515 | 9,986 | 22,316 | 29,434 |
| Other income—gain on asset sales, net | 74,847 | — | 112,260 | — |
| Segment income (loss) | $75,595 | $(1,313) | $112,383 | $(3,500) |

#### Three Months Ended September 30, 2020 and 2019

**Revenues**. Revenues decreased by $3.4 million, or 39.3%, to $5.3 million for the three months ended September 30, 2020, from $8.7 million for the three months ended September 30, 2019. The decrease in revenues was mainly attributable to the Gateway Commercial Venture no longer receiving rental income from the tenant of the two buildings at the campus that were sold in August 2020.

**Other income.** In August 2020, the Gateway Commercial Venture closed on the sale of two buildings, comprising a total of approximately 660,000 square feet of research and development space currently leased to a subsidiary of Broadcom Inc. under a triple net lease for a purchase price of $355.0 million. The sale of the buildings, which had a carrying value of approximately $278.0 million, resulted in a gain of approximately $74.8 million, net of transaction costs. Concurrently, the Gateway Commercial Venture made a debt payment of $245.0 million to its lender and made total distributions to its members of approximately $107.0 million, of which approximately $80.3 million was distributed to us.

**Costs and expenses.** Costs and expenses decreased by $5.5 million, or 54.8%, to $4.5 million for the three months ended September 30, 2020, from $10.0 million for the three months ended September 30, 2019. As a result of the Gateway Commercial Venture’s asset dispositions and related debt repayments in 2020, cost and expenses, including interest, depreciation, and amortization expenses, are lower in the three months ended September 30, 2020 compared to the same period in 2019.

#### Nine Months Ended September 30, 2020 and 2019

**Revenues**. Revenues decreased by $3.5 million, or 13.5%, to $22.4 million for the nine months ended September 30, 2020, from $25.9 million for the nine months ended September 30, 2019. The decrease in revenues was mainly attributable to the Gateway Commercial Venture no longer receiving rental income from the tenant of the two buildings at the campus that were sold in August 2020.

**Other income.** In May 2020, the Gateway Commercial Venture closed on the sale of approximately 11 acres of land and an approximately 189,000 square foot building to City of Hope for a purchase price of $108.0 million. The sale of this land and building, which had a carrying value of approximately $67.5 million, resulted in a gain of approximately $37.4 million, net of transaction costs. Concurrently, the Gateway Commercial Venture made a debt payment of $30.0 million to its lender and made total distributions to its members of approximately $75.0 million, of which approximately $56.3 million was distributed to us.

In August 2020, the Gateway Commercial Venture closed on the sale of two buildings, comprising a total of approximately 660,000 square feet of research and development space currently leased to a subsidiary of Broadcom Inc. under a triple net lease for a purchase price of $355.0 million. The sale of the buildings, which had a carrying value of approximately $278.0 million, resulted in a gain of approximately $74.8 million, net of transaction costs. Concurrently, the Gateway Commercial Venture made a debt payment of $245.0 million to its lender and made total distributions to its members of approximately $107.0 million, of which approximately $80.3 million was distributed to us.

**Costs and expenses.** Costs and expenses decreased by $7.1 million, or 24.2%, to $22.3 million for the nine months ended September 30, 2020, from $29.4 million for the nine months ended September 30, 2019. As a result of the Gateway Commercial Venture’s asset dispositions and related debt repayments in 2020, cost and expenses, including interest, depreciation, and amortization expenses, are lower in the nine months ended September 30, 2020 compared to the same period in 2019.

The table below reconciles the Commercial segment results to the equity in earnings (loss) from our investment in the Gateway Commercial Venture that is reflected in the condensed consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019.

*(in thousands)*

|  | Three Months Ended September 30, 2020 | 2019 | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Segment net income (loss) from operations | $75,595 | $(1,313) | $112,383 | $(3,500) |
| Less net income of management company attributed to the Commercial segment | 104 | 99 | 298 | 226 |
| Net income (loss) of the Gateway Commercial Venture | 75,491 | (1,412) | 112,085 | (3,726) |
| Equity in earnings (loss) from the Gateway Commercial Venture | $56,618 | $(1,060) | $84,064 | $(2,795) |

### Financial Condition, Liquidity and Capital Resources

As of September 30, 2020, we had $270.6 million of consolidated cash and cash equivalents compared to $346.8 million at December 31, 2019. As of September 30, 2020, no funds have been drawn on the operating company’s $125.0 million revolving credit facility. However, letters of credit of $0.3 million are issued and outstanding under the revolving credit facility, thus reducing the available capacity to $124.7 million.

Our short-term cash needs consist primarily of general and administrative expenses and development expenditures at Valencia and the Candlestick and The San Francisco Shipyard communities, interest payments under our senior notes and payments under a related party reimbursement obligation. The development stages of our master-planned communities continue to require significant cash outlays on both a short-term and long-term basis. While our current financial position is strong, and the new home market has seen a recovery from the initial reaction to the COVID-19 pandemic, the COVID-19 pandemic has had a significant impact on the U.S. and California economies and our business and the extent and duration of the current environment is unknown. We will continue to manage our development activities and expenditures to coincide with projected demand for homesites by our guest builders. We expect to meet our cash requirements for at least the next 12 months with available cash, proceeds from land sales in Valencia, distributions from our unconsolidated entities and collection of management fees under our various management agreements.

Our long-term cash needs relate primarily to future horizontal development expenditures and investments in, or vertical construction costs for, properties that we may acquire or develop for our income-producing portfolio. We budget our cash development costs on an annual basis. Budgeted amounts are subject to change due to delays or accelerations in construction or regulatory approvals, changes in inflation rates and other increases (or decreases) in costs. We may also modify our development plans or change the sequencing of our communities in response to changing economic conditions, consumer preferences and other factors, which could have a material impact on the timing and amount of our development costs. Budgeted amounts are expected to be funded through a combination of available cash, cash flows from our communities and reimbursements from public financing, including community facilities districts, tax increment financing and local, state and federal grants. Cash flows from our communities may occur in uneven patterns as cash is primarily generated by land sales, which can occur at various points over the life cycle of our communities.

We continue to analyze the impact of various potential timeline delays to our communities as a result of COVID-19. In each scenario, we currently expect to have sufficient capital to fund the horizontal development of our communities in accordance with our development plan for several years. However, the duration and lasting effects of COVID-19 are unknown, we may experience cost increases, our plans may change or circumstances may arise that result in our needing additional capital to execute our development plan. In addition, the level of capital expenditures in any given year may vary due to, among other things, the number of communities or neighborhoods under development and the number of planned deliveries, which may vary based on market conditions. We may seek to raise additional capital by accessing the debt or equity capital markets or with one or more revolving or term loan facilities or other public or private financing alternatives. These financings may not be available on attractive terms, or at all.

### Summary of Cash Flows

The following table outlines the primary components of net cash provided by (used in) operating, investing and financing activities (in thousands):

|  | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Operating activities | $(115,713) | $(251,193) |
| Investing activities | 57,129 | 517 |
| Financing activities | (18,080) | 85,731 |

**Cash Flows from Operating Activities.** Cash flows from operating activities are primarily comprised of cash inflows from land sales, management services, operating property results and returns on capital invested in our unconsolidated entities. Cash outflows are comprised primarily of cash outlays for horizontal development costs, interest payments on our senior notes, employee compensation and selling, general, and administrative costs. Our operating cash flows may vary significantly each year due to the timing of land sales and the development efforts related to our communities and unconsolidated entities.

Net cash used in operating activities decreased by $135.5 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Major components of operating cash used in both periods consist of our continued investment in horizontal development at our communities and selling, general, and administrative costs. During the nine months ended September 30, 2020, we received total distributions of $136.5 million from the Gateway Commercial Venture, of which $79.0 million is reflected as a return on our investment (operating activity) and collected $13.9 million in principal on a note receivable from a home builder in connection with a land sale at Valencia that closed in the second quarter. During the nine months ended September 30, 2019, we settled the accrued interest on the Macerich promissory note of $11.1 million. We also used $24.6 million and $19.7 million during the nine months ended September 30, 2020 and 2019, respectively, for interest due on our senior notes.

**Cash Flows from Investing Activities.** Net cash provided by investing activities was $57.1 million for the nine months ended September 30, 2020 compared to $0.5 million net cash provided by investing activities for the nine months ended September 30, 2019.

For the nine months ended September 30, 2020, we received total distributions of $136.5 million from the Gateway Commercial Venture, of which $57.5 million is reflected as a return of our investment (investing activity). During the nine months ended September 30, 2019, we received a return of our investment in the Gateway Commercial Venture of $2.0 million. For the nine months ended September 30, 2020, we also received a distribution of $1.7 million from our indirect legacy interest in the Great Park Venture. In both periods, the distributions were offset by our purchases of properties and equipment.

**Cash Flows from Financing Activities.** Net cash used in financing activities was $18.1 million for the nine months ended September 30, 2020 compared to $85.7 million net cash provided by financing activities for the nine months ended September 30, 2019.

We used $5.5 million and $4.1 million during the nine months ended September 30, 2020 and 2019, respectively, to net settle certain share-based compensation awards with employees for tax withholding purposes. For the nine months ended September 30, 2020, we made a noncontrolling interest tax distribution of $4.6 million in accordance with the operating company's Limited Partnership Agreement (“LPA”). The tax distribution is treated as an advance distribution under the LPA. We also made payments of $8.0 million to reduce our related party reimbursement obligation during the nine months ended September 30, 2020. For the nine months ended September 30, 2019, we issued an aggregate of $125.0 million principal amount of 7.875% senior notes due 2025. During the nine months ended September 30, 2019, we also received cash proceeds of $25.0 million related to the issuance of San Francisco Venture Class C units to an affiliate of Lennar (see Note 5 to our condensed consolidated financial statements included under Part I, Item 1 of this report) and repaid the Macerich promissory note of $65.1 million.

### Changes in Capital Structure

During the nine months ended September 30, 2020, our ownership percentage in the operating company increased to 62.5%, primarily due to the operating company issuing us additional Class A units in connection with our issuance of Class A common shares under our share-based compensation plan. Additionally, we reacquired approximately 0.4 million restricted Class A common shares from employees for income tax withholding purposes that resulted in the operating company retiring an equal number of Class A units of the operating company that we previously held.

The table below summarizes outstanding Class A units of the operating company and Class A units of the San Francisco Venture (redeemable on a one-for-one basis for Class A units of the operating company) held by us and held by noncontrolling interest members at September 30, 2020 and December 31, 2019.

| Class A units of the operating company: | September 30, 2020 | December 31, 2019 |
| --- | ---: | ---: |
| Held by us | 69,051,284 | 68,788,257 |
| Held by noncontrolling interest members | 41,363,271 | 41,363,271 |
|  | 110,414,555 | 110,151,528 |
| Class A units of the San Francisco Venture held by noncontrolling interest members | 37,870,273 | 37,870,273 |
|  | 148,284,828 | 148,021,801 |

At September 30, 2020, we had 79,233,544 Class B common shares that were held by the noncontrolling interest members of the operating company and the Class A unitholders of the San Francisco Venture. The Class B common shares will automatically convert to Class A common shares at a ratio of 0.0003 Class A common shares for each Class B common share. The conversions will occur when the holders of Class A units of the operating company, including Class A units that have been issued upon redemption of Class A units of the San Francisco Venture, are redeemed at our election for our Class A common shares or cash.

### Contractual Obligations and Commitments

Other than below, our contractual obligations have not changed materially from those reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

On April 1, 2020, we were obligated to make an $18.6 million payment under our related party reimbursement obligation. We entered into a new agreement, however, on April 1, 2020, pursuant to which the related party affiliate agreed to defer our reimbursement obligation with respect to $12.6 million of the total payment for a period of five years. The deferred $12.6 million reimbursement amount will accrue interest at a rate of 6% per year and can be prepaid by us at any time without any premium or penalty. We paid the $6.0 million non-deferred portion of the reimbursement obligation on April 1, 2020. Additionally, throughout 2020, we have been notified by related party affiliates that certain reimbursements that were previously expected to be due in 2020 have been deferred to 2021 or 2022. These deferred amounts continue to incur interest at the original interest rate. Subject to extensions, the Company currently expects to make principal reimbursement payments of $22.8 million, $20.5 million, $38.5 million and $12.6 million in the balance of 2020, 2021, 2022 and 2025, respectively.

We are committed under various letters of credit (“LOCs”) to perform certain development activities and provide certain guarantees in the normal course of business. Outstanding LOCs totaled $1.3 million and $2.4 million at September 30, 2020 and December 31, 2019, respectively. At September 30, 2020 and December 31, 2019, we had $1.0 million and $1.4 million, respectively, in restricted cash and certificates of deposit securing certain of our LOCs. Additionally, under our revolving credit facility, we are able to utilize undrawn capacity to support the issuance of LOCs. As of September 30, 2020, we were using approximately $0.3 million in capacity under the revolving credit facility to support LOCs. In the ordinary course of business and as a part of the entitlement and development process, we are required to provide performance bonds to ensure completion of certain development obligations. We had outstanding performance bonds of $229.3 million as of September 30, 2020.

At September 30, 2020, we had outstanding guarantees benefiting a municipal agency for infrastructure and construction of certain park and open space obligations with aggregate maximum obligations of $198.3 million.

### Critical Accounting Policies

There have been no significant changes to our critical accounting policies during the nine months ended September 30, 2020 as compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

### Recently Issued Accounting Pronouncements and Developments

See Note 2 to our condensed consolidated financial statements included under Part I, Item 1 of this report for a discussion of new accounting pronouncements applicable to the Company.

### Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of September 30, 2020.

### Seasonality

Our business and results of operations are not materially impacted by seasonality.

## Market risk

As filed, 1,150 characters.

Market risk is the risk of loss from adverse changes in market prices and interest rates. Our future earnings, cash flows and fair values relative to financial instruments are dependent upon prevailing market interest rates. Our primary market risk results from our indebtedness, which bears interest at fixed rates. Although we do not currently do so, we may in the future manage our market risk on floating rate debt by entering into swap arrangements to in effect fix the rate on all or a portion of the debt for varying periods up to maturity. This would, in turn, reduce the risks of variability of cash flows created by floating rate debt and mitigate the risk of increases in interest rates. Our objective when undertaking such arrangements would be to reduce our floating rate exposure, as we do not plan to enter into hedging arrangements for speculative purposes.

As of September 30, 2020, we had outstanding consolidated net indebtedness of $617.2 million, none of which bears interest based on floating interest rates.

We have not entered into any transactions using derivative financial instruments or derivative commodity instruments.

## Controls and procedures

As filed, 1,467 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the supervision and participation of our President and Chief Executive Officer and our Vice President and Chief Financial Officer (the “Certifying Officers”), has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2020. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management, including our Certifying Officers and our Board of Directors, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, the Certifying Officers concluded that our disclosure controls and procedures were effective as of September 30, 2020.

### Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 3,817 characters.

In addition to the risk factors previously identified in our Annual Report on Form 10-K for the year ended December 31, 2019, we have added the following risk factor to expand our discussion of risks related to public health issues and other events that may impact our business.

***Our business has been disrupted by the present outbreak and worldwide spread of COVID-19 and could be materially and adversely affected by COVID-19 or by a similar epidemic or pandemic, or similar public threat, or fear of such an event, and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it.***

The U.S. and other countries have experienced, and may experience in the future, outbreaks of contagious diseases that affect public health and public perception of health risk. In late 2019, a novel coronavirus (COVID-19) emerged in the Wuhan region of China and has subsequently spread worldwide. The World Health Organization has declared COVID-19 a pandemic, resulting in federal, state and local governments and private entities mandating various restrictions, requiring closure of non-essential businesses and recommending people remain at home in all of the markets we serve. In response to these steps, we temporarily limited development activities at our communities, shifted substantially all of our office functions to work remotely, placed restrictions on business travel for our employees, and imposed mandatory quarantine periods for employees who may have been exposed to COVID-19.

Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence and consumer confidence. There is significant uncertainty regarding the extent to which and how long COVID-19 and related government directives, actions and economic relief efforts will disrupt the U.S. economy. Our business could be negatively impacted over the medium-to-longer term if the disruptions related to COVID-19 decrease consumer confidence generally or with respect to purchasing a home; cause civil unrest; or precipitate a prolonged economic downturn and/or an extended rise in unemployment or tempering of wage growth, any of which could lower demand for homesites at our communities; impair our ability to generate revenues and cash flows and/or to access the capital or lending markets (or significantly increase the costs of doing so); increase the costs or decrease the availability of contractors and subcontractors and other talent, including as a result of infections or medically necessary or recommended self-quarantining; and/or result in our recognizing charges in future periods, which may be material, for asset impairments similar to the impairment of $26.9 million attributed to our investment in the Great Park Venture primarily as a result of expected delays in both the timing of land sales to builders and distributions to us causing a decline in the fair value of our investment in the Great Park Venture described above in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The extent to which COVID-19 impacts our operational and financial performance will depend on future developments, including the duration and spread of COVID-19 and the impact on homebuilders and our trade partners and employees, all of which are highly uncertain and cannot be predicted. If COVID-19 has a significant negative impact on economic conditions over a prolonged period of time, our results of operations and financial condition could be adversely impacted. COVID-19 also may have the effect of heightening many of the other risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Filed Nov 9, 2020.
Source: SEC EDGAR, the filing index for accession 0001574197-20-000028. Last ingested by Listed: Nov 9, 2026, 23:40 ET. No prices; not investment advice.