Comstock Holding Companies, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The company develops and builds homes and provides real estate services, primarily in the Washington, D.C. metropolitan area. Unless noted otherwise, amounts below are in millions of dollars.
Financial results and position
- Q3 revenue: $13.8, up from $13.1 a year earlier. Homebuilding revenue was $13.1; other revenue was $0.7.
- Q3 results: Operating loss of $1.2 and net loss of $1.2, versus losses of $0.9 and $0.8, respectively, in Q3 2016. Net loss attributable to common stockholders was $1.5, or $0.45 per diluted share, compared with $1.1, or $0.34 per share.
- Nine-month revenue and results: Revenue was $34.6 versus $32.8. Net loss narrowed to $2.4 from $3.5; net loss attributable to common stockholders was $0.8 versus $4.9, reflecting in part a $1.0 non-cash gain associated with extinguishing Series B preferred stock.
- Margins: Homebuilding gross margin was 4.5% in Q3, versus 7.0% in the comparative table (the narrative says 6.9%). For nine months it was 7.7%, versus 7.0% in the table (7.1% in the narrative). Management attributed the nine-month improvement to cost reductions; Q3 margin fell amid unit and product mix.
- Cash flow: The cash flow statement reports $3.0 provided by operating activities for the first nine months, $0.8 used in investing, and $5.9 used in financing. Cash and cash equivalents declined $3.7 to $2.1; restricted cash was an additional $1.0.
- Debt and equity: Notes payable totaled $44.0, up from $43.7 at year-end 2016; total liabilities were $52.9 and total equity was $3.1. The company reported a deficit attributable to Comstock of $11.4. Real estate inventories were $48.5.
Changes in operations
- Nine-month homebuilding revenue rose $1.3, while settlements declined to 72 units from 76. Q3 settlements fell to 24 from 33.
- Net new orders declined to 12 units in Q3 from 18, and to 64 for nine months from 86. Nine-month net new order revenue declined to $32.8 from $37.7. Backlog was 27 units, valued at $16.4, versus 35 units and $16.4 a year earlier.
- Other revenue increased, primarily from the July 2017 acquisition of Monridge Environmental’s business assets for approximately $2.3. The acquired operation, JK Environmental Services, contributed about $0.5 of revenue during the reported periods. The provisional purchase allocation included $1.7 of goodwill.
- Nine-month selling and marketing expense fell to $1.1 from $1.3, and general and administrative expense to $3.7 from $4.2. Management cited cost savings, lower headcount and reduced overhead.
Liquidity, outlook and risks
- Near-term maturities: $22.7 of facilities and project loans were scheduled to mature or require curtailment during the remainder of 2017. The company was negotiating extensions. After quarter-end, the $11.6 Comstock Growth Fund loan was extended to April 16, 2018; the filing also notes a $0.5 construction borrowing that matured after quarter-end, with an extension under discussion.
- A secured line of credit matured December 31, 2017. The company obtained a waiver for failure to meet its minimum-liquidity covenant at September 30, while reporting compliance with its minimum-net-worth covenant. Defaults could accelerate obligations and trigger cross-default provisions.
- Management expected available cash, lender extensions, private-placement capital and community settlement proceeds to be sufficient for operations over the next 12 months, but gave no assurance. It also cited potential cost reductions or expense deferrals. No formal revenue or earnings guidance was provided.
- Subsequent financing and capital events included a $5.0 Comstock Investors X capital raise in October, accompanied by warrants, and a $3.3 redemption of remaining Comstock IX investor interests.
- Risks include access to capital and debt service, refinancing and covenant compliance, real estate market conditions, construction labor and material costs, development approvals, and reliance on affiliates. No material legal proceedings were reported. Outstanding letters of credit were $1.1 and performance bonds $4.0; none had been drawn.
- Disclosure controls were judged effective as of September 30, 2017; no material change in internal control over financial reporting was reported during the quarter.
Investor verification points
- Reconcile the cash-flow comparison: the 2017 cash flow statement reports 2016 operating cash flow of negative $6.2, while MD&A initially says positive $0.6; MD&A later refers to negative $6.2.
- Confirm homebuilding margin comparisons, which differ between the tables and narrative for both 2016 periods.
- Track extensions, repayments and covenant status for the $22.7 of year-end 2017 maturities, including the line-of-credit liquidity waiver and construction loan extension discussions.
- Assess order trends, cancellations, backlog conversion and the profitability and funding needs of the environmental-services acquisition and development pipeline.