Comstock Holding Companies, Inc. (Nasdaq: CHCI) — FY2020 Form 10-K
Reporting period: Year ended December 31, 2020; comparison is FY2019. Amounts are in U.S. dollars, generally in millions unless stated otherwise. This is an annual report, not a standalone fourth-quarter report.
Business context
Comstock is a Washington, D.C.-area real estate developer, operator and asset manager, with a fee-based business focused on mixed-use and transit-oriented properties and related real estate services. The company completed its strategic shift away from on-balance-sheet homebuilding; homebuilding results are reported as discontinued operations. At year-end, assets under management included 25 operating assets, two commercial properties under construction totaling approximately 460,000 square feet, and an 18-asset development pipeline. The two buildings under construction were 79% pre-leased.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $28.7 million | $25.3 million |
| Operating income | $2.6 million | $2.3 million |
| Net income from continuing operations | $2.1 million | $1.5 million |
| Net income, including discontinued operations | $2.1 million | $0.9 million |
| Basic / diluted EPS | $0.26 / $0.24 | $0.13 / $0.13 |
| Cash provided by operating activities | $3.4 million | $8.4 million |
- Revenue grew 13.5%. Asset management revenue rose 11.8% to $21.9 million; real estate services revenue rose 19.1% to $6.8 million, mainly from environmental-services growth.
- Operating income increased to $2.6 million, while operating margin was approximately 8.9%, compared with 9.0% in 2019. General and administrative expense doubled to $3.0 million, partly reflecting higher headcount and overhead.
- Cash and cash equivalents were $7.0 million at year-end, versus $3.5 million a year earlier. Current assets were $12.4 million and current liabilities $4.5 million.
- Notes payable totaled $5.5 million, primarily a $5.5 million affiliate revolving-line borrowing due April 2023; the $10 million facility bears interest at WSJ Prime plus 1%. The company repaid its former 10% Comstock Growth Fund debt. Separately, operating lease liabilities were $7.9 million, largely associated with the new headquarters lease.
- Equity-method real estate investments carried at fair value declined to $6.3 million from $8.4 million, including a $0.2 million fair-value loss in 2020. Total assets were $28.6 million and total liabilities $17.4 million.
Material changes and notable items
- Operating cash flow fell from $8.4 million to $3.4 million. The 2019 figure included $7.8 million from discontinued operations; 2020 operating cash flow came from continuing operations.
- The company received a $1.95 million Paycheck Protection Program loan and accounted for it as a government grant, reducing eligible expenses. It had used the proceeds for qualified costs and expected full forgiveness, but SBA approval remained pending at the filing date.
- A new ten-year headquarters lease with an affiliate controlled by the CEO began November 1, 2020; disclosed future minimum payments were approximately $9.8 million.
- Related parties accounted for 79% of 2020 revenue ($22.8 million), including the asset-management relationship covering the Anchor Portfolio. The CEO controls key affiliated entities involved in these arrangements.
- The balance sheet reported $17.2 million of liquidation preference on Series C preferred stock. No common-stock dividends were paid, and none were anticipated in the foreseeable future.
Outlook, risks and contingencies
Management provided no quantified financial guidance in the filing. It expressed confidence in the Anchor Portfolio and its ability to manage risk and pursue growth, while noting that the long-term effects of COVID-19 on commercial real estate, economic conditions and consumer confidence remained uncertain. Management highlighted opportunities from development deliveries, the broader pipeline and growth in Northern Virginia technology and government sectors.
Principal risks include COVID-19 and real estate market conditions; competition and the ability to retain skilled personnel; development, construction, regulatory and environmental risks; access to capital; fair-value estimates for investments; and reliance on related parties. The company reported no material pending legal proceedings. The auditor issued an unqualified opinion on the financial statements; the audit identified the assessment of whether Investors X was a variable interest entity for which Comstock was the primary beneficiary as a critical audit matter. Management reported disclosure controls and internal control over financial reporting as effective.
Important facts for investors to verify
- Whether the SBA ultimately forgave the $1.95 million PPP loan and whether any repayment obligation arose.
- Cash collection and credit exposure for related-party receivables of $3.6 million, and the sustainability of revenue concentration with related parties.
- Terms, economics and termination protections of the 2019 asset management agreement and other CEO-affiliate arrangements, including the headquarters lease.
- Leasing, delivery timing and financing progress for the two buildings under construction, as well as conversion of the development pipeline into fee-generating assets.
- Valuation assumptions and realizability of the $6.3 million fair-value investment balance, and potential dilution from equity compensation and outstanding share equivalents.