Comstock Holding Companies, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. The company develops and builds residential and mixed-use real estate and provides real estate services, primarily in the Washington, D.C. metropolitan area. Unless noted, amounts below are in millions of dollars.
Financial performance and position
- Revenue: Q2 revenue was $10.52 million, up 5.4% year over year; first-half revenue was $20.79 million, up 5.6%. Homebuilding accounted for $10.24 million in Q2 and $20.30 million in the first half.
- Profit and margins: Consolidated net loss was $0.54 million for Q2 and $1.20 million for the first half, versus losses of $1.46 million and $2.75 million, respectively, in 2016. Operating losses improved to $0.56 million in Q2 and $1.25 million in the first half. Homebuilding gross margin rose to 9.9% in Q2 from 5.2%, and to 9.7% for the first half from 7.2%.
- Common-stockholder results: The company reported net income attributable to common stockholders of $0.39 million for Q2 and $0.67 million for the first half, despite consolidated losses. First-half common income includes a $1.01 million preferred-stock extinguishment adjustment; Q2 attribution also reflects a loss allocated to non-controlling interests. Basic EPS was $0.12 for Q2 and $0.20 for the first half.
- Cash flow and liquidity: First-half operating cash flow was $1.91 million, compared with $0.63 million in 2016; investing used $0.14 million and financing used $4.91 million. Cash and cash equivalents fell to $2.62 million from $5.76 million at year-end; restricted cash was $1.51 million. The filing does not provide a clear current ratio.
- Debt and equity: Total notes payable were $42.49 million, down from $43.70 million at year-end; total liabilities were $51.43 million. Total equity was $4.39 million, down from $8.38 million, and the company’s stockholders’ deficit was $10.02 million. Debt includes secured project borrowings and unsecured affiliate loans, including related-party financing.
Changes versus the prior comparable period
- Revenue and homebuilding gross margin improved, and operating losses narrowed, while reported consolidated results remained loss-making.
- Q2 net new orders fell to 18 units from 33, and net new-order revenue declined to $8.43 million from $14.95 million. For the first half, net orders were 52 versus 68 and net order revenue was $25.47 million versus $29.88 million. Management attributed the declines to the number and mix of homes sold and cancellations.
- Settlements increased to 23 units in Q2 from 21 and to 48 in the first half from 43. Backlog at June 30 was 39 units worth $22.38 million, compared with 50 units worth $21.51 million a year earlier.
- Sales and marketing and general and administrative expenses decreased, which management attributed to cost reductions, lower headcount and overhead savings.
Outlook, risks and unusual items
- Near-term liquidity risk: $32.62 million of borrowings and project loans were scheduled to mature or require curtailment through the end of 2017. The company was negotiating extensions and modifications. It said it expected available cash, private-placement capital and community settlement proceeds to support operations for 12 months, contingent on successful debt extensions and other funding; it gave no assurance of success.
- The company obtained a lender waiver for failing the minimum-liquidity covenant on its secured line of credit at June 30, 2017; it reported compliance with the minimum-net-worth covenant. Debt agreements include other restrictions and potential cross-default provisions.
- After quarter-end, the company reported securing extensions for certain July 2017 loan maturities. It also extended a $6.4 million revolving facility related to The Towns at 1333 to January 15, 2018. In July, a subsidiary purchased Monridge Environmental’s business assets for $2 million.
- Contingencies include $1.1 million of letters of credit and $4.0 million of performance bonds, with no amounts drawn. The company reported no material legal proceedings. It disclosed no off-balance-sheet arrangements.
- Related-party matters include a corporate office lease from an entity owned by the CEO, service arrangements with a CEO-owned entity, and affiliate financing. The company also reported a Series B-to-Series C preferred-stock exchange; Series C has discretionary rather than mandatory dividends.
- Management noted homebuilding seasonality: orders typically peak in spring and summer, with more deliveries and cash receipts expected in the second half. No numerical earnings or revenue guidance was provided.
Important facts for investors to verify
- Progress, terms and remaining maturities of lender extensions, and the company’s ability to meet debt service and covenant requirements.
- Whether cash, private placements and home settlements provide sufficient liquidity, given $2.62 million in unrestricted cash and the stated 12-month funding condition.
- Whether orders, cancellations, settlements and backlog support revenue and cash generation in the second half.
- The effects of affiliate debt, related-party transactions, preferred-stock terms and non-controlling interests on cash obligations and common-stockholder earnings.
- Whether the post-quarter environmental-services acquisition and other growth initiatives require additional capital or affect operating performance.