Comstock Holding Companies, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated figures; dollar amounts below are in millions unless otherwise noted.
Business context
Comstock is a real estate development and construction services company focused on the Washington, D.C. metropolitan area, operating in Homebuilding, Multi-family and Real Estate Services. At quarter-end, it reported 831 building lots owned or controlled under option agreements. Multi-family reported no segment revenue in the periods shown.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $18.367 | $9.572 | $38.121 | $33.342 |
| Gross profit | $3.266 | $2.663 | $7.127 | $7.519 |
| Operating income (loss) | $1.022 | $0.406 | ($0.426) | $1.424 |
| Consolidated net income (loss) | $0.991 | $0.250 | ($0.521) | $1.426 |
| Net loss attributable to Comstock | ($0.159) | ($0.739) | ($3.402) | ($0.854) |
| Basic and diluted loss per share | ($0.01) | ($0.03) | ($0.16) | ($0.04) |
- Homebuilding gross margin was 17.6% in Q3 versus 25.6% a year earlier, and 18.5% for the nine months versus 22.5%. Management attributed the decline to the mix of units settled and two projects beginning settlements.
- For the nine months, operating cash flow was $0.752, investing cash flow was ($0.602), and financing cash flow was ($7.118). Cash and cash equivalents declined to $4.927 from $11.895 at December 31, 2013; restricted cash was $2.828.
- At September 30, total notes payable were $32.002, compared with $29.968 at year-end 2013. Total liabilities were $43.798 and total equity was $10.620, versus $37.820 and $19.059, respectively. Debt maturities/curtailments included $4.972 due in the remainder of 2014 and $20.442 in 2015.
- Reported backlog was 31 units representing $15.896 of revenue, down from 50 units and $22.470 a year earlier. Nine-month net new orders were 85 units versus 104.
Changes versus the prior comparable period
- Q3 revenue rose 92%, with homebuilding settlements increasing to 35 homes from 20. Nine-month revenue rose about 14%, and settlements increased to 82 from 63.
- Despite higher year-to-date revenue, nine-month operating results shifted to a loss. The prior-year period included a $0.722 impairment reversal; 2014 included a $0.611 severance and restructuring charge related to the former COO’s departure.
- Cash from operations improved from a $5.986 use in the first nine months of 2013 to $0.752 provided in 2014. The 2014 financing outflow included $8.290 of distributions to non-controlling interests, compared with $0.367 in 2013.
- Non-controlling interests received $2.881 of nine-month income while Comstock recorded a $3.402 attributable loss. Investors should distinguish consolidated earnings from the amount attributable to the parent.
Outlook, risks and unusual items
- Management said it expected available cash, settlement proceeds, debt and project-level capital raises, and settlements from new communities to provide sufficient resources for debt service, investment and working capital over the next 12 months. This expectation depends on financing and sales activity; it is not a quantified earnings forecast.
- On October 17, 2014, after quarter-end, the company entered into a related-party-administered financing arrangement with an initial $10 million unsecured loan and up to $20 million available. It bears interest at 30-day LIBOR plus 9.75%, with a 10% floor, and has a three-year term. The stated uses include development funding and repayment of private-placement or mezzanine obligations.
- Other subsequent events included a $5.4 million redemption of remaining Comstock VII investor interests, $0.401 of distributions to Comstock VIII investors, and approval of a share repurchase program for up to 3 million Class A shares.
- Secured debt includes variable-rate facilities; certain mezzanine loans bear rates of 12% or 13.5%. The new $5 million line of credit had $2.4 million drawn at quarter-end, matured in July 2015 (with a conditional extension option), and had financial covenants with which the company reported compliance. The CEO guarantees this line and one mezzanine loan.
- Outstanding letters of credit were $4.8 million and performance/payment bonds were $4.3 million; none had been drawn. The company said any full claim could be material, though it could not predict potential liability. It reported no material litigation and no off-balance-sheet arrangements.
- Related-party matters include an office lease from an entity wholly owned by the CEO, services billed to a CEO-owned entity, and unsecured affiliate debt. Management identified real estate market and interest-rate conditions, debt-service capacity, approvals, construction costs, capital availability and key-person retention among relevant risks.
Important facts for investors to verify
- Whether the October financing was funded as expected, and its actual cost, availability, covenants and use of proceeds.
- How the 2014–2015 debt maturities and the company’s stated 12-month liquidity plan were addressed.
- Whether backlog converts to settlements and cash, given lower backlog and net orders and weaker homebuilding margins.
- The cash and earnings effects of investor distributions/redemptions, related-party transactions and the new share repurchase authorization.