Comstock Holding Companies, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; this is an annual filing, not a standalone fourth-quarter report. Financial statement amounts below are in millions of dollars unless stated otherwise. The company operates primarily in the Washington, D.C. region and is shifting from for-sale homebuilding to asset management and real estate services.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $56.7 | $45.4 |
| Operating loss | $(5.1) | $(4.8) |
| Net loss | $(4.0) | $(4.8) |
| Net loss attributable to common stockholders | $(4.5) | $(4.1) |
| Basic and diluted loss per share | $(1.22) | $(1.21) |
| Cash provided by operating activities | $16.3 | $4.7 |
| Cash used in investing activities | $(0.04) | $(0.6) |
| Cash used in financing activities | $(12.1) | $(8.2) |
| Cash and cash equivalents at year-end | $5.8 | $1.8 |
| Total debt, net of discounts and deferred financing costs | $18.9 | $39.4 |
| Total assets | $35.1 | $51.2 |
| Total equity | $6.6 | $2.6 |
- Revenue mix: Homebuilding generated $41.2 million, asset management $12.5 million, and real estate services $3.0 million. Asset-management revenue was new in 2018 under the Master Asset Management Agreement (AMA).
- Profitability: Homebuilding gross margin was negative 3.7%, versus positive 6.5% in 2017. Segment gross profit before impairment charges was $1.2 million for asset management, a loss of $0.1 million for real estate services, and a loss of $1.6 million for homebuilding.
- Cash flow: Operating cash flow benefited principally from a $22.4 million release of real estate inventory as homes and land were sold during the wind-down. It should not be read as evidence of recurring earnings or cash generation from the new platform.
- Debt and liquidity: Debt declined by about $20.5 million year over year. Scheduled maturities at year-end were $6.7 million in 2019 and $6.3 million in 2020, with the remainder thereafter. The company reported $1.2 million of restricted cash in addition to cash and cash equivalents. The filing does not provide a clear current-liability total or current ratio.
Material changes versus 2017
- Revenue increased 25%, principally because the company began reporting $12.5 million of asset-management revenue under the AMA. Homebuilding revenue fell $2.2 million to $41.2 million; real estate services revenue rose $1.0 million to $3.0 million.
- Homebuilding settlements fell to 54 finished units from 89. Backlog declined to 16 units worth approximately $10.4 million from 20 units worth $13.9 million.
- Impairment charges increased to $2.2 million from $0.5 million, reflecting unsuccessful negotiations and changed market conditions at certain communities.
- General and administrative expense decreased to $1.3 million from $5.3 million, partly because the AMA shifted personnel and public-company costs into asset-management cost of sales, as well as through lower headcount and overhead savings.
- Affiliate financing was materially restructured: notes associated with CEO-owned entities were exchanged in part for Series C preferred stock. At year-end, Series C preferred stock had a stated liquidation preference of approximately $14.0 million.
Outlook, risks, and unusual items
- Management expected to substantially complete the on-balance-sheet homebuilding wind-down by the second quarter of 2019, while anticipating residual land development and finished-lot sales beyond 2019. Future homebuilding activity, if any, was expected to be off balance sheet on an asset-management basis.
- The company’s principal asset-management client under the AMA, CDS, is wholly owned by the CEO. The AMA provides a cost-plus fee that includes dedicated personnel and public-company costs plus a fixed annual payment of $1.0 million; the agreement also included a $2.5 million deposit credited against fees. Management disclosed that the AMA and related-party concentration make revenue dependent on CDS, its assets, and continued agreement performance.
- Management said it expected sufficient resources for the next 12 months, conditional on successful lender extensions or modifications, available cash, and proceeds from community settlements. The filing also describes reliance on private debt and equity placements, including insider participation. This outlook is conditional, not a guarantee.
- At March 29, 2019, the company reported that lender obligations coming due through that date had been repaid or extended; a $1.8 million project loan was paid in full on March 14, 2019. The filing also identifies $4.9 million of affiliate notes scheduled to mature before year-end 2019, with the company retaining a unilateral ability to extend them.
- Key risks include refinancing and covenant compliance, dependence on a related-party client and CEO financing, real-estate market and interest-rate exposure, inventory values and further impairments, access to capital, construction costs and labor availability, and the company’s ability to complete its transition profitably.
- The $0.92 million income-tax benefit reported in the income statement partly offset the pre-tax loss; the filing associates tax benefits with the affiliate-note conversion. The company reported approximately $147 million of federal and state net operating losses, substantially offset by a valuation allowance and subject to possible ownership-change limitations.
- The company reported no material pending legal proceedings. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end; the auditor issued an unqualified opinion on the financial statements but did not audit internal control effectiveness.
Most important facts for investors to verify
- Whether the AMA continues in force, whether its cost-plus fees and client assets support recurring revenue, and how much revenue remains dependent on the CEO-owned client.
- Actual lender extensions, repayments, covenant compliance, and maturities after year-end, including the affiliate notes and any collateral or cross-default exposure.
- Whether the reported operating cash flow is repeatable after the substantial inventory liquidation, and the company’s cash needs to finish winding down homebuilding.
- Progress on the stated 2019 homebuilding wind-down, remaining inventory and lot sales, and any additional impairments or losses.
- The economic and dilution implications of the Series C preferred stock, related-party financing, authorized-share increases, and CEO voting control.