Business context and reporting period
Comstock Holding Companies, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015. The company develops and sells homes and condominiums, pursues multifamily projects, and provides real estate services, primarily in the Washington, D.C. metropolitan area. The filing also reports fourth-quarter results. Unless stated otherwise, financial statement amounts below are in millions of dollars; the statements present amounts in thousands.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $61.376 | $47.965 |
| Homebuilding revenue | $60.132 | $47.378 |
| Operating loss | $(3.556) | $(2.976) |
| Consolidated net loss | $(1.963) | $(3.114) |
| Net loss attributable to Comstock | $(4.567) | $(6.839) |
| Basic and diluted loss per share | $(1.43) | $(2.27) |
| Operating cash flow | $2.560 | $(5.224) |
Homebuilding gross margin fell to 14.2% from 19.5%. At year-end, cash and cash equivalents were $12.448 million, restricted cash was $2.566 million, real estate inventories were $38.223 million, total assets were $58.478 million, and total liabilities were $53.037 million. Total debt was $45.399 million, including $24.823 million secured by real estate inventories, $19.028 million of unsecured affiliate notes (net of discount), and $1.548 million of other unsecured notes. Company-attributable equity was a deficit of $1.276 million; total equity, including non-controlling interests, was $5.441 million.
The company settled 123 homes, versus 102 in 2014; average settlement price rose to $489,000 from $464,000. New orders increased to 124 net units from 98, while year-end backlog was 25 units with $10.785 million of stated revenue, compared with 24 units and $12.430 million in 2014. Buyer cancellation rates were approximately 15% in 2015 and 16% in 2014.
Material changes versus the prior comparable period
- Revenue rose 28%, driven by more settlements and a higher average settlement price. Homebuilding revenue increased $12.754 million.
- Despite higher revenue, homebuilding gross margin declined 5.3 percentage points, reflecting settlement mix and higher land and overhead costs at newer communities. Operating loss widened by $0.580 million.
- Consolidated net loss narrowed, but the loss attributable to Comstock also reflects income allocated to non-controlling interests; it should not be confused with consolidated net loss.
- Operating cash flow improved by $7.784 million, mainly from inventory releases and reductions in other assets, including land-option deposit refunds. Financing activities provided $3.131 million.
- Debt declined modestly from $45.931 million to $45.399 million, while cash increased from $7.498 million to $12.448 million. Restricted cash also increased from $1.779 million to $2.566 million.
Outlook, risks, contingencies, and unusual items
- Liquidity and maturities: $20.779 million of debt maturities or curtailment obligations were scheduled for 2016. By the April 1, 2016 filing date, the company reported extensions of obligations through June 30, 2016 and was seeking longer-term modifications. Management expected available cash, private placements, settlements, and successful extensions to fund operations for the next 12 months, but gave no assurance. Defaults could trigger acceleration, cross-defaults, and foreclosure on project collateral.
- Related-party financing: A $5 million CGF II loan was arranged in December 2015 at 10% annual interest; it was repaid January 8, 2016. On March 30, 2016, the company received a further $3 million CGF II advance. CGF II was funded by an entity wholly owned by the CEO. The company also converted a Stonehenge affiliate note, including accrued interest totaling $3.861 million, into Series B preferred stock bearing cumulative 8.75% annual dividends.
- Impairments and taxes: The company wrote off $2.765 million of project-related costs in 2015, versus $2.695 million in 2014. The Stonehenge conversion resulted in a reported taxable gain and tax-related adjustments. Approximately $123 million of federal and state net operating losses, with potential tax savings of about $48 million, were fully reserved; use may be limited by ownership changes.
- Principal risks: Dependence on the Washington, D.C. market; limited liquidity and reliance on lenders and private capital; short-term and variable-rate debt; homebuyer mortgage availability and cancellations; land and inventory valuation; project delays, zoning and permitting; labor and material costs; weather; construction defects and warranty claims; and competition. The company reported no material legal proceedings. Outstanding letters of credit were $2.7 million and performance/payment bonds were $4.6 million; none had been drawn at year-end.
- Other notable matters: A 1-for-7 reverse stock split took effect in September 2015. The company reported a sharp decline in its Class A share price during 2015. Management concluded disclosure controls and internal control over financial reporting were effective at year-end. No formal numerical operating guidance was provided.
Most important facts an investor should verify
- Whether 2016 loan extensions were replaced by durable long-term arrangements, and the current status of the $20.8 million scheduled maturities.
- Whether operating cash generation and home settlements can support debt service and working capital without continued insider-related financing or additional capital raises.
- Whether homebuilding margins recover after the decline to 14.2%, and whether backlog converts to settlements at expected prices.
- How the related-party loans, preferred dividends, affiliate notes, and project-level non-controlling interests affect cash available to common shareholders.
- Whether inventory impairment assumptions, warranty reserves, and the realizability and ownership-change protection of tax attributes remain appropriate.