Comstock Holding Companies, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unless otherwise noted, amounts below are in millions of dollars. The company completed its exit from homebuilding and land development in April 2019 and now operates through asset management and real estate services platforms.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $5.240 | $3.441 | $14.751 | $10.133 |
| Operating income (loss) | $0.215 | $(0.182) | $0.711 | $(0.223) |
| Continuing-operations net income (loss) | $(0.577) | $0.274 | $(0.231) | $0.761 |
| Net loss, including discontinued operations | $(0.643) | $(1.927) | $(0.827) | $(3.652) |
- Revenue increased 52% in Q3 and 46% for the nine-month period. Asset management revenue was $4.293 million in Q3 and $12.178 million year to date; real estate services revenue was $0.947 million and $2.573 million, respectively.
- Q3 gross profit was $0.668 million, approximately 12.7% of revenue, versus $0.062 million, approximately 1.8%, a year earlier. Nine-month gross profit was $1.945 million, approximately 13.2% of revenue, versus $0.753 million, approximately 7.4%.
- Q3 continuing-operations loss included a $0.606 million fair-value loss on the Investors X equity-method investment and $0.186 million interest expense. The investment’s reported fair value was $8.603 million at quarter-end.
- Cash and cash equivalents were $1.598 million at September 30, versus $0.854 million at year-end 2018. Current assets were $5.274 million and current liabilities $7.377 million. Total assets were $16.071 million; total liabilities were $8.850 million.
- Total notes payable were $6.326 million, including $4.981 million of unsecured affiliate debt, $0.750 million of secured debt and $0.595 million of other unsecured debt. The affiliate note was reported due in April 2020; management said obligations with lenders had been extended or repaid through November 14, 2019.
- Cash flow from operations was $6.841 million for the nine months, but included $7.429 million from discontinued operations; investing activities provided $0.001 million and financing activities used $6.098 million. Ending cash was $1.598 million.
Material changes and developments
- Under the April 30 Master Transfer Agreement with CEO-controlled affiliates, the company transferred management of Investors X and associated debt obligations, and classified the homebuilding activities as discontinued operations. Investors X was deconsolidated on July 23 after an operating-agreement amendment; the company retained an investment carried at fair value.
- Shares outstanding rose materially: Class A shares issued increased from 3.704 million at December 31, 2018 to 7.833 million at September 30, 2019, including shares issued in transactions associated with the business transition and warrant exercises. Non-controlling interests fell from $15.706 million to zero, largely following conversions into company shares and preferred stock.
- Related parties generated $4.235 million, or about 81% of Q3 revenue, and $12.206 million of nine-month revenue. The principal asset-management agreement is with CDS, an entity controlled by the CEO.
- On October 8 and October 21, the company paid a cumulative $1.5 million at-risk deposit toward a potential commercial office acquisition by a single-asset entity controlled by CDS. Closing was expected before year-end 2019; the filing does not confirm that it occurred.
Outlook, risks and unusual items
- No quantitative earnings or revenue guidance is provided. Management describes a strategy centered on fee-based asset management and real estate services, with an aim to grow assets under management and reduce balance-sheet exposure to property development.
- The 2019 asset-management agreement with CDS runs through December 31, 2027, subject to renewal and termination provisions. Fees include a cost-plus or market-rate annual fee and supplemental incentive and transaction-based fees. The cost-plus structure is intended to cover specified operating costs, but the business is substantially dependent on the CEO-affiliated customer and portfolio.
- Management cited general real estate and economic risks, interest rates, debt servicing, competition, government approvals, capital availability, labor and material costs, and ongoing affiliate relationships. The company reported approximately $160 million of federal and state net operating losses; changes in ownership could limit their use under Section 382.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2019. The company reported a material weakness in accounting for complex second-quarter divestiture transactions and said it was strengthening review processes and use of outside expertise.
- The filing reports no material legal proceedings and no off-balance-sheet arrangements. Q3 discontinued-operations loss was $0.066 million, compared with $1.887 million a year earlier; nine-month discontinued-operations loss was $0.283 million, compared with $3.819 million.
Important facts for investors to verify
- Current status, maturity, and extension or repayment terms of the $4.981 million affiliate note, and the company’s ability to meet near-term obligations.
- Completion and funding of the $1.5 million at-risk deposit transaction, including related-party terms and any additional capital commitments.
- Revenue concentration in CDS and other CEO-controlled entities, and the durability and collectability of fees under the asset-management agreements.
- Valuation assumptions and future cash flows supporting the $8.603 million Investors X investment, which uses Level 3 inputs.
- Progress in remediating the material weakness and the effect of share issuances, preferred-stock liquidation preferences, and potential dilution on common shareholders.