Comstock Holding Companies, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; comparative figures are for FY 2013. The filing was signed April 14, 2015. Amounts below are in millions unless otherwise noted.
Business context
Comstock is a real estate development and services company primarily focused on the Washington, D.C. metropolitan area. Its reportable segments are Homebuilding, Multi-family, and Real Estate Services. In 2014, revenue was principally from homebuilding; the filing reports no Multi-family segment revenue for either 2014 or 2013.
At year-end, the company reported a pipeline of 1,146 estimated units across owned or controlled communities: 200 settled, 24 in backlog, 371 owned unsold, and 551 under control. The backlog represents executed buyer orders not yet settled.
Financial results and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Total revenue | $47.965 | $54.614 |
| Homebuilding revenue | $47.378 | $53.806 |
| Operating income (loss) | ($2.976) | $2.740 |
| Net income (loss), consolidated | ($3.114) | $2.661 |
| Net income (loss) attributable to Comstock | ($6.839) | ($2.030) |
| Basic and diluted loss per share | ($0.32) | ($0.10) |
| Net cash used in operating activities | ($5.224) | ($4.339) |
| Cash and cash equivalents at year-end | $7.498 | $11.895 |
| Total notes payable at year-end | $45.931 | $29.968 |
Homebuilding gross margin was 19.5%, down from 22.7%; excluding a warranty-reserve release, the 2014 margin was 19.1%. Homebuilding delivered 102 units versus 107, while average settlement price fell to $464,000 from $503,000. Gross new orders declined to 116 from 147, net new orders to 98 from 126, and the cancellation rate rose to approximately 16% from 14%.
At December 31, 2014, total assets were $56.367 million, total liabilities $54.512 million, and total equity $1.855 million, down from $19.059 million in 2013. Restricted cash was $1.779 million. Operating cash use reflected inventory investment and increased deposits on land purchase contracts. Financing cash flow was $0.567 million, versus $11.514 million provided in 2013, including substantially higher distributions to non-controlling interests.
Of $45.931 million in total debt, $28.718 million was scheduled to mature or require curtailment in 2015. The company reported $28.379 million of secured real-estate debt and $15.488 million of unsecured affiliate notes, net of discount. Its CGF affiliate loan carried interest at 30-day LIBOR plus 9.75%, subject to a 10% floor, and required annual principal curtailments.
Material changes, outlook, and risks
- Revenue fell about 12% year over year. Lower deliveries, a lower average settlement price, sales mix, and the exit from impaired legacy projects contributed to weaker homebuilding revenue and margins. Comstock shifted from consolidated net income in 2013 to a consolidated net loss in 2014.
- A $2.695 million net impairment charge/write-off was recorded in 2014, principally a $2.7 million write-off of land and development costs for Momentum | Shady Grove after a change in disposition strategy. FY 2013 included a $1.1 million write-off and a $0.7 million impairment reversal.
- Management said it expected, subject to lender extensions or modifications and other financing and settlement proceeds, to have sufficient resources to sustain operations for the next 12 months. It cautioned that there was no assurance. After year-end, certain Eagle Bank and mezzanine loans were extended to June 22, 2015; the filing does not establish that all 2015 maturities were resolved.
- In October 2014, Comstock Growth Fund (CGF) began a private placement and made a loan to the company. The initial subscription included $10 million from an entity wholly owned by the CEO; the loan’s borrowing capacity was later raised to $25 million. Additional CGF proceeds and equity-linked awards were reported after year-end.
- Other unusual items included a $0.597 million severance charge related to the former COO and a $0.182 million warranty-reserve release in 2014. A $0.177 million out-of-period adjustment reduced fourth-quarter general and administrative expense; management stated the correction was not material to prior or 2014 financial statements.
- Key risks include refinancing and liquidity, reliance on private placements and insider funding, real-estate inventory impairments, Washington-area market concentration, buyer mortgage availability and cancellations, construction costs and labor, regulatory/entitlement delays, and potential foreclosure if debt is not refinanced. The filing also notes related-party financing and governance considerations, including the CEO’s ownership of the Comstock trademark and the Class B holders’ voting control.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The auditor issued an unqualified opinion on the consolidated financial statements.
Fourth-quarter information
For the three months ended December 31, 2014, revenue was $9.844 million, operating loss was $2.550 million, consolidated net loss was $2.593 million, and net loss attributable to Comstock was $3.437 million, or $0.15 per share. Fourth-quarter 2013 revenue was $21.272 million and net loss attributable to Comstock was $1.176 million, or $0.07 per share.
Most important facts for investors to verify
- Whether all scheduled 2015 debt maturities were extended, refinanced, or repaid, and the resulting interest, collateral, and covenant terms.
- Actual liquidity and cash generation against management’s 12-month assessment, including settlement proceeds and further CGF funding.
- The sales, absorption, and valuation assumptions supporting the Momentum | Shady Grove impairment and the carrying value of remaining real-estate inventory.
- Progress in orders, cancellations, settlements, average selling prices, and margins relative to the 2014 declines.
- The full economic and dilution effects of CGF’s affiliate financing, warrants and share awards, and the Section 382 rights plan.