EXHIBIT 99.1
Below is a Report to Stockholders delivered by of the Chairman of HomeFed
Corporation at the Annual Meeting of Stockholders on July 12, 2005. Except for
the historical information contained herein, certain information contained in
this report includes forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such
statements include, without limitation, statements regarding the anticipated
benefits and expected consequences of the unit sales, land sales, development
costs and other expenses. These forward-looking statements are subject to risks
and uncertainties that may cause actual results to differ materially. For a
discussion of factors that may cause results to differ, see HomeFed's SEC
reports, including its Quarterly Report on Form 10-Q for the quarter ended March
31, 2005, its Annual Report on Form 10-K for the year ended December 31, 2004
and its Proxy Statement for the Annual Meeting of Stockholders dated June 20,
2005. These forward-looking statements speak only as of the date hereof. HomeFed
disclaims any intent or obligation to update these forward-looking statements.
Report to Stockholders
Good afternoon. As I mentioned before, I am Joseph Steinberg,
Chairman of HomeFed Corporation and I am pleased to provide you with a report on
the past year's significant events since our last annual meeting held on August
24, 2004.
At that meeting, I mentioned in my comments that although we were
continuing to make progress on our two major projects, we were concerned about
the possibility of a slowdown in the economy and in the San Diego housing
market. I went on to say that despite those concerns, we could not avoid the
need to invest significant amounts of money to complete the San Elijo Hills
project in anticipation of selling the remaining lots to builders. We have
stayed on course and although we have not seen a sustained or substantial
decline in real estate sales at the retail level, there are indications that the
market exuberance that we have experienced has changed to caution, especially
among builders, if not homebuyers. I will have more to say about this later.
For the year ended December 31, 2004, HomeFed reported net income of
$36.8 million on revenues of $81.7million. This compares to net income of $74.1
million on revenues of $148.3 million for the year ended December 31, 2003.
Revenues for 2004 included $72.1 million from the sale of lots at San Elijo and
$5.8 million from the sale of undeveloped land at Otay Ranch. The decline in
sales and income from 2003 to 2004 is the result of the phasing of the
development at San Elijo Hills, and not from market forces or any particular or
unforeseen problems.
Sales for San Elijo are recognized using the percentage of completion
method of accounting. At each closing, a portion of the sales proceeds are
deferred and not recognized until completion of the required improvements to the
property are completed. As a result, at year-end 2004, HomeFed had $39.1 million
in deferred revenue, and estimated it would cost $8.9 million to complete the
required improvements. The $5.8 million in revenues at Otay were from the sale
of open space mitigation land that contributed $4.8 million in pre-tax gain.
HomeFed has not had any other subsequent sales of Otay Ranch land so we still
own about 2,200 acres of open space mitigation land and about 700 acres of
potential development land.
As of December 31, 2004, HomeFed's balance sheet showed $116.9
million of unrestricted cash and other investments and total assets of $211.5
million. The Company's year-end net worth was $113.8 million.
The year-end audit of HomeFed included an audit of the company's
internal controls all in compliance with the new federal regulations under the
Sarbanes-Oxley Act of 2002, which was enacted as a result of numerous corporate
scandals. Fortunately and with great effort, HomeFed passed and was given an
unqualified opinion by PricewaterhouseCoopers. Our accounting staff led by Erin
Ruhe, with guidance and oversight from our Audit Committee, worked hard and
successfully to complete a much expanded accounting and audit program. Let's
give them a round of applause.
For the first quarter ended March 31, 2005, total revenue was $4.5
million which included recognition of previously deferred revenue of $3.5
million, profit and revenue participations paid by builders of $600,000 and
marketing fees of $400,000. Net income was $642,000. As of March 31st, the
Company had $108 million of unrestricted cash and investments. On April 19,
2005, the Company's Board of Directors declared a 50 cent per share dividend
which was subsequently paid. The Board has not adopted a policy regarding future
dividends. This shareholder enjoys the dividends.
There are an additional 841 lots and condominium sites remaining to
be sold and closed at San Elijo Hills. This does not include 72 additional
affordable housing units, which are expected to close later this year on which
we do not make any money. Of these 841 lots and condominiums, 40 units will be
condominiums built as part of a mixed-use Town Center, which HomeFed intends to
build. We expect construction of the Town Center to commence this fall. The
approximate 135,000 square feet of retail space is expected to easily lease at
good rental rates. Our leasing brokers have a long list of prospective tenants.
Some other Town Center sites including those for a grocery store, gas station,
convenience store and daycare facility will be sold rather than leased. The sale
of the Town Center condominiums are a new product with less tested demand, but
we are optimistic on their appeal to some buyers.
We currently have 372 of the remaining 841 single family lots and
condominiums in escrow subject to 10% deposits for $141.4 million with closings
of these expected to begin in October/November 2005 continuing through August
2006. These are large lots with excellent views and are in the best locations.
The remaining unsold 429 single family lots are also similarly situated and will
be marketed to builders through a process which involves soliciting and
evaluating bids, selecting a builder for each neighborhood (usually the high
bidder), and then allowing the builder 30 to 45 days to complete the due
diligence before opening escrow with a 10% non-refundable deposit. If during
that diligence, the builder decides not to go forward with the purchase, than
another builder is chosen as a replacement, but usually at a lower price. So far
this process has been a good way to sell lots on the best terms. The builder
deposits are non-refundable unless we fail to deliver the lots and related
improvements on schedule, which has not happened and is not likely. This is not
to say that even with timely delivery that every builder will close rather than
forfeit their 10% deposit. A substantial change in market demand might make the
builders get cold feet and prefer default to ruin, but so far so good.
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Recently, we established a new subsidiary at San Elijo as a
residential real estate brokerage operation, which initially will concentrate on
the resale market at San Elijo Hills and the surrounding area. This is a new
business, which we expect will flourish, particularly given our unique
familiarity with San Elijo Hills and our exclusive right to have a brokerage
office in the community. There are approximately 2,050 occupied homes, including
condominiums, at San Elijo Hills, which is expected to provide a good market for
resale listings.
Now I'd like to make a few comments on Otay, where our next
development activity will take place. As reported last year, the City of Chula
Vista is going through a General Plan Update and related general plan amendment
process that includes revising land uses and entitlements. When completed this
process is expected to enhance the value of the development land we own in the
Otay Ranch thanks to an increase in improved densities in exchange for Otay
contributing land for a planned university site and for related mitigation
purposes. The increased densities, if approved, will provide for additional
residential dwelling units and an increase in the square footage of future
retail and commercial development. As part of this process, we are negotiating a
revised development agreement with the City to protect our entitlements.
The General Plan amendments have been delayed and are now about six
months behind schedule. Further delays are expected, because of difficulties the
City has experienced with certain landowners who are opposed to the land uses
proposed for their land. As part of the update process, the City must also
release an environmental impact report that is subject to public review and
challenge. We expect that this delay may continue for a period of months, or
even years but ultimately the outcome should be favorable to HomeFed.
We have two significant development areas in Otay, the Village Town
Center and the University Town Center, commonly referred to as parcels B and C,
respectively. The site plans for these two communities were done by Peter
Calthorpe, who helped design the San Elijo Hills Town Center. The proposed
preferred alternatives supported by the city staff call for up to 1,800 dwelling
units in the Village Town Center and 4,200 dwelling units in the University Town
Center as opposed to 850 and 2,000 as presently entitled. There may also be as
much as 1.8 million square feet of commercial development. For those of you
familiar with La Jolla, the University Town Center Development is not dissimilar
to what is planned for our land in Otay. All of this planning is still subject
to ongoing public review with many changes possible, both good and bad, until
final approval by Chula Vista City Council. Whether market demand will coincide
with these approvals is anyone's guess.
A HomeFed subsidiary is plaintiff and is continuing lawsuits to
recover the cost of clean-up from the former owners and operators of a shooting
range that was located on about 30 acres of land owned in the Otay River Valley.
We are in the process of completing the environmental investigation and the
design of a remediation plan for the site. If the lawsuit goes to trial, it
should take place in 2006 with uncertain outcome. In 2002, HomeFed recorded a
loss provision of $11.2 million for this possible liability. Additional charges
of $300,000 and $1,300,000 were taken in 2003 and 2004.
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Rampage Vineyard, LLC is the HomeFed subsidiary that owns 2,159 acres
of farm land in Madera County in the Central Valley just north of Fresno. This
land is presently a grape vineyard purchased in 2003 for about $6 million. We
believe that Madera County is in the path of development for the expanding
Fresno market. As part of the original acquisition, we leased 1,100 acres of the
vineyard to the former owner and began a program to restore the remainder of the
land to active farming in order to generate income while we work on the
entitlements. Approximately 600 acres of the land is subject to purchase options
previously granted to a neighboring land owner, who is expected to close its
purchase later this year for about $ 5 million, which will also hopefully settle
some outstanding litigation.
A preliminary site plan for Rampage shows that the land will support
a large master planned community. The entitlement process and build out and
absorption of the homes could take up to 20 years. California requires that the
water supply to any large size residential development be sufficient to meet the
water demands of the project for a period of 20 years. We are working on this
aspect of the Rampage project in view of the fact that there is no readily
available adequate supply of water, but with time and effort we hope water can
be obtained.
As I have stated in the past, we continue to look for new deals.
Earlier this year we hired Pike Oliver, who has over 30 years experience in all
aspects of real estate development. Pike holds bachelors and master degrees in
urban planning from San Francisco State and UCLA. At HomeFed he is going to work
exclusively on finding and putting together new deals. A market correction would
help Pike and HomeFed. If you have any prospects, please call him. Get out your
pencil - 760-602-3767.
Since our last meeting in August 2004, we have continued to be
concerned about the resilience of the residential real estate market,
particularly in San Diego County. In the fourth quarter of 2004, there was a
steep decline in residential sales in the San Diego market but in the first
quarter of 2005 the market made what seems to be a recovery. Some of our
builders are less enthusiastic than they have been in the past. We lost a few
deals recently and lowered some lot prices to attract builders though still at
handsome lot prices and profits for us. Our goal is to sell our last lots as
quickly as possible and to declare victory. Consumers are buying homes with easy
credit at escalating prices that can not be sustained in a recession or in a
period of increasing interest rates. It is inevitable that there will be a
downturn though the term "soft landing" is a mystery to us. For one man's
opinion on the excesses of our local San Diego market take a look at the web
site of the self-proclaimed pundit "Professor Piggington" at "piggington.com".
He is as dire as one can be about the skyrocketing prices, cheap money and easy
credit that is fueling this market. With caution in mind, your Company's Board
and management, is intent on continuing to maximize the value of what we own
while looking for new opportunities and hopefully not going broke in the
process.
Our thanks to Paul Borden, Curt Noland, Erin Ruhe, our Board of
Directors and the rest of our staff. We look forward to the future with caution,
enthusiasm and endless worry.
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