Comstock Holding Companies, Inc. — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013. The filing also reports fourth-quarter results. Comstock develops homes and real estate projects and provides real estate services, primarily in the Washington, D.C. metropolitan area.
Financial and operating results
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $54.6 million | $14.3 million |
| Homebuilding revenue | $53.8 million | $11.6 million |
| Operating income (loss) | $2.7 million | $(12.0) million |
| Net income (loss), consolidated | $2.7 million | $(5.6) million |
| Net income (loss) attributable to Comstock | $(2.0) million | $(5.7) million |
| Cash used in operating activities | $4.3 million | $16.0 million |
| Cash and cash equivalents at year-end | $11.9 million | $3.5 million |
| Total notes payable at year-end | $30.0 million | $27.6 million |
Amounts are rounded. Consolidated 2013 net income includes $4.7 million attributable to non-controlling interests; the parent company therefore reported a net loss. Homebuilding gross margin was 22.7%, or 21.9% excluding a $0.4 million warranty-reserve release. Homebuilding settlements rose to 107 units from 45; average settlement price increased to $503,000 from $259,000. Net new orders increased to 126 from 51. Year-end backlog was 28 units, with $12.3 million of reported backlog revenue.
At December 31, 2013, total assets were $56.9 million, liabilities $37.8 million, and equity $19.1 million. Real estate inventories were $39.8 million. Restricted cash was $2.5 million, separate from unrestricted cash. Cash flow from investing activities was positive $1.2 million and financing activities provided $11.5 million. The filing does not provide a clear current ratio or a single unrestricted-liquidity total inclusive of borrowing availability.
Fourth quarter: Revenue was $21.3 million, operating income $1.3 million, and net income from continuing operations $1.2 million; the net loss attributable to Comstock was $1.2 million.
Changes versus prior year
- Revenue and home settlements increased sharply as new communities came on line and the company completed sales at legacy projects Eclipse and Penderbrook. Other revenue declined to $0.8 million from $2.7 million, principally as rental units were sold and prior-year contracting work concluded.
- Operating results improved substantially from 2012, which included a $2.4 million impairment charge. In 2013, Comstock reversed $0.7 million of that prior impairment but also wrote off $1.1 million of BLVD Newell entitlement and due-diligence costs after failing to obtain approvals; net impairment charges and write-offs were $0.3 million.
- General and administrative expense declined to $6.7 million from $8.0 million, while sales and marketing expense rose to $2.0 million from $0.6 million as development and sales activity expanded.
- Operating cash use improved from $16.0 million to $4.3 million, but remained negative. Year-end cash increased largely through financing, including private placements and net borrowing activity. Secured loan-to-inventory ratio fell to 57% from 70%, according to management.
Outlook, risks, and unusual items
- Management expected net new order volume to expand in 2014 and believed the housing recovery was at an early stage. It anticipated sufficient resources to sustain operations for the next 12 months through private-placement proceeds, cash, and settlement proceeds, while explicitly providing no assurance.
- Management cited rising mortgage rates, tight mortgage underwriting, buyer uncertainty, and higher land, labor, and construction costs as pressures. It planned to focus on margins, capital allocation, use of existing land, and limiting unsold speculative inventory. No formal earnings or revenue guidance was provided.
- Capital is project-financed and dependent on lenders and equity sources. Debt includes variable-rate facilities, near-term maturities, and company guarantees. Year-end maturities or curtailment obligations totaled $11.5 million in 2014 and $11.2 million in 2015. Secured debt was $22.7 million; unsecured affiliate debt owed to an entity owned by the CEO was $4.7 million.
- Two investor private placements raised $7.3 million and $4.0 million, respectively. Investors receive a cumulative 20% annual preferred return, compounded annually. Related-party participation and the high preferred return are important financing terms to assess.
- New project loans included a $2.1 million acquisition/development loan and $3.4 million revolving construction loan for Maxwell Square, and a $3.7 million acquisition/development loan plus $3.5 million revolving construction loan for Hallcrest. These loans carry variable rates, have 24-month maturities subject to conditions, and are guaranteed by the company; the Hallcrest loan also has limited personal guarantees from senior executives.
- Letters of credit were $4.3 million and performance/payment bonds $2.1 million at year-end; none had been drawn. The company cautioned that a call or default could materially affect its financial position, results, or cash flows. No material legal proceedings were reported.
- Comstock reported approximately $118.5 million of federal and state net operating losses, with potential tax savings of about $46 million, fully reserved. An ownership change under Section 382 could limit their use. The company also reported a 14% buyer cancellation rate in 2013, versus 13% in 2012.
Key facts for investors to verify
- Reconcile consolidated profitability with the parent-attributable loss, including the $4.7 million of earnings attributable to non-controlling interests and the terms governing those interests.
- Review project-level debt maturities, borrowing availability, covenants, variable-rate exposure, guarantees, and the company’s ability to meet near-term obligations.
- Assess whether operating cash flow can turn positive as the company funds inventory growth and delivers backlog; distinguish unrestricted from restricted cash.
- Validate backlog conversion, cancellation trends, sales pace, realized pricing, and gross margins, including the effect of the warranty-reserve release.
- Examine entitlement and impairment assumptions, including the BLVD Newell write-off, and monitor contingent exposure from letters of credit, bonds, warranties, and environmental matters.
- Review the 20% preferred-return private placements, insider participation, affiliate debt and lease arrangements, and executive voting control.