10-Q: HOMEFED CORP (San Elijo Hills Development Company) July 28th, 2011 Quarterly Report

Form 10-Q for HOMEFED CORP


28-Jul-2011 Quarterly Report

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Interim Operations.Liquidity and Capital Resources For the six month periods ended June 30, 2011 and 2010, net cash was used for operating activities, principally for real estate expenditures at the San Elijo Hills and Otay Ranch projects, general and administrative expenses, farming operations at the Rampage property and estimated federal and state tax payments. The Company’s principal sources of funds are proceeds from the sale of real estate, fee income from the San Elijo Hills project, dividends and tax sharing payments from its subsidiaries, borrowings from or repayment of advances by its subsidiaries and cash and cash equivalents and investments. As of June 30, 2011, the Company had aggregate cash, cash equivalents and investments of $67,000,000 to meet its current liquidity needs and for future investment opportunities.

As of June 30, 2011, the remaining land at the San Elijo Hills project to be developed and sold or leased consisted of the following (including real estate under contract for sale or real estate sold subsequent to June 30, 2011):

Single family lots                        325
Multi-family units                         30
Square footage of commercial space     51,200

As of July 25, 2011, the Company has entered into agreements to sell 59 single family residential lots to a homebuilder for cash proceeds of $17,750,000, and to sell a Towncenter commercial lot to a daycare operator for cash proceeds of $550,000, both of which have not closed. During the second quarter of 2011, the Company received non-refundable option deposits of $1,800,000 from the homebuilder and $50,000 from the buyer of the Towncenter commercial lot. These option payments are non-refundable if the Company fulfills its obligations under the agreements, and will be applied to reduce the amount due from the purchaser at closing. Although these agreements are binding on the purchasers, should the Company fulfill its obligations under the agreements within the specified timeframes and the purchasers decide not to close, the Company’s recourse will be primarily limited to retaining the option payments.

In July 2011, the Company sold a Towncenter commercial lot to a bank for cash proceeds of $1,400,000, and will recognize a gain of $1,150,000 during the third quarter of 2011.

As more fully discussed in the 2010 10-K, residential property sales volume, prices and new building starts have declined significantly in many U.S. markets, including California and the greater San Diego region, which have negatively affected sales and profits at the San Elijo Hills project. The slowdown in residential sales has been exacerbated by the turmoil in the mortgage lending and credit markets, which has resulted in stricter lending standards and reduced liquidity for prospective home buyers. Sales of new homes and re-sales of existing homes have declined substantially from the early years of the project’s development.

The Company has substantially completed development of all of its remaining residential single family lots at the San Elijo Hills project, many of which are “premium” lots which are expected to command premium prices if, and when, the market fully recovers. Although recent homebuilder interest and sales activity in the project are encouraging, it is too soon to determine if the long slump in the housing market is coming to an end, or when the Company will be able to sell its remaining inventory. The Company believes that by exercising patience and waiting for market conditions to improve it can best maximize shareholder value with its remaining residential lot inventory. However, on an ongoing basis the Company evaluates the local real estate market and economic conditions in general, and updates its expectations of future market conditions as it continues to assess the best time to market its remaining residential lot inventory for sale.

The Towncenter includes multi-family residential units and commercial space, which are being constructed in phases. The Company has completed construction of the first phase of the Towncenter, which includes 12 residential condominium units and 11,000 square feet of commercial space. Ten of the twelve condominium units have been sold. The Company has entered into leases for seven of the nine phase one retail spaces covering 8,800 square feet; all of the tenants have opened for business. The Company is currently evaluating design options for phase two of the Towncenter.

In January 2011, the Company acquired in a foreclosure sale the Fanita Ranch property, a 2,600 acre parcel of vacant land located in Santee, California. The aggregate purchase price of $12,350,000 consisted of cash consideration of $11,000,000 and the assumption of certain payables. Fanita Ranch is partially entitled for approximately 1,400 residential units. The Company acquired the property with the intention of completing the necessary entitlements to develop the property as a master-planned community, although there can be no assurance that the Company will be successful in these efforts. If successful, obtaining all the entitlements is expected to take several years.

Sales price $ 400,000 $ 1,250,000 $ 7,400,000 $ 3,250,000During the three month periods ended June 30, 2011 and 2010, cost of sales of real estate aggregated $400,000 and $1,050,000, respectively, and during the six month periods ended June 30, 2011 and 2010, cost of sales of real estate aggregated $4,000,000 and $2,700,000, respectively.

Otay Ranch Project:

There was no real estate sales activity at the Otay Ranch project during the three and six months ended June 30, 2011 and 2010. As discussed in the 2010 10-K, the Company continues to evaluate how to maximize the value of this investment while pursuing land sales and processing further entitlements on portions of its property. The Otay Ranch Project is in the early stages of development; as a result, the Company does not expect any sales activity in the near future.

 


Other Results of Operations Activity

The Company recorded co-op marketing and advertising fees of $50,000 and $80,000 for the three and six month periods ended June 30, 2011, respectively. There were no co-op marketing and advertising fees recorded during the three month and six month periods ended June 30, 2010. The Company records these fees when the San Elijo Hills project builders sell homes, and are generally based upon a fixed percentage of the homes’ selling price. These fees provide the Company with funds to conduct its marketing activities.

General and administrative expenses decreased during the three month period ended June 30, 2011 as compared to the same period in 2010 primarily due to lower legal expenses. Legal expenses decreased by $400,000 principally due to lower legal fees associated with litigation brought by a minority shareholder against one of the Company’s subsidiaries related to the San Elijo Hills project, as well as lower legal fees related to corporate matters and decreased litigation activity at the Otay Ranch project.

The change in interest and other income (expense), net for the three and six month periods ended June 30, 2011 as compared to the same periods in 2010 primarily reflects an increase in farming expenses at the Rampage property of $50,000 and $150,000 for the three and six month 2011 periods, respectively, resulting from increased vineyard rejuvenation, replanting and repairs, and for the six month 2011 period $150,000 of income relating to proceeds received from the settlement of a contract dispute.

The Company’s effective income tax rate is higher than the federal statutory rate due to California state income taxes.

Cautionary Statement for Forward-Looking Information

Statements included in this Report may contain forward-looking statements. Such statements may relate, but are not limited, to projections of revenues, income or loss, development expenditures, plans for growth and future operations, competition and regulation, as well as assumptions relating to the foregoing. Such forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this Report, the words “estimates,” “expects,” “anticipates,” “believes,” “plans,” “intends” and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements.

Factors that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted or may materially and adversely affect the Company’s actual results include but are not limited to the following: the performance of the real estate industry in general; changes in mortgage interest rate levels or changes in consumer lending practices that reduce demand for housing; recent turmoil in the mortgage lending markets; the economic strength of the Southern California region where our business is currently concentrated; changes in domestic laws and government regulations or in the implementation and/or enforcement of government rules and regulations; demographic changes in the United States generally and California in particular that reduce the demand for housing; increases in real estate taxes and other local government fees; significant competition from other real estate developers and homebuilders; delays in construction schedules and cost overruns; increased costs for land, materials and labor; imposition of limitations on our ability to develop our properties resulting from condemnations, environmental laws and regulations and developments in or new applications thereof; earthquakes, fires and other natural disasters where our properties are located; construction defect liability on structures we build or that are built on land that we develop; our ability to insure certain risks economically; shortages of adequate water resources and reliable energy sources in the areas where we own real estate projects; changes in the composition of our assets and liabilities through acquisitions or divestitures; the actual cost of environmental liabilities concerning our land could exceed liabilities recorded; opposition from local community or political groups at our development projects; and our ability to generate sufficient taxable income to fully realize our deferred tax asset. For additional information see Part I, Item 1A. Risk Factors in the 2010 10-K.

Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. The Company undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this Report or to reflect the occurrence of unanticipated events.

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