Comstock Holding Companies, Inc. — Q3 2015 Form 10-Q
Business and period: Unaudited results for the three and nine months ended September 30, 2015. Comstock is a Washington, D.C.-area real estate development and construction services company with Homebuilding, Multi-family, and Real Estate Services segments. The Multi-family segment reported no revenue in the periods shown.
Financial results and position
Amounts are in millions, except per-share data and where noted.
- Q3 revenue: $12.3, down 33% from $18.4 in Q3 2014. Homebuilding revenue was $12.0; other revenue was $0.2.
- Q3 profitability: Gross profit was $1.4 versus $3.3 a year earlier. Homebuilding gross margin fell to 11% from 18%. Operating loss was $1.0, compared with operating income of $1.0. Consolidated net loss was $1.0; net loss attributable to Comstock was $1.1, or $0.33 per share.
- Nine-month revenue: $35.2, down 8% from $38.1. Gross profit was $4.8 versus $7.1; homebuilding gross margin was 12% versus 19%. Operating loss was $2.7, compared with a $0.4 loss in 2014. Consolidated net loss was $2.0; net loss attributable to Comstock was $2.8, or $0.90 per share.
- Orders and backlog: Q3 net new orders rose to 40 units from 18; nine-month net orders were 105 versus 85. September 30 backlog was 59 units valued at $29.2, compared with 31 units and $15.9 a year earlier. Settlements declined to 24 units in Q3 from 35 and to 70 for nine months from 82.
- Cash flow: Nine-month operating cash use was $7.4, versus $0.8 provided in 2014, principally reflecting an $8.2 increase in real estate inventory investment. Investing cash use was $0.6; financing provided $2.2. Cash and cash equivalents declined $5.7 to $1.8. Restricted cash was $2.5.
- Debt and liquidity: Notes payable totaled $46.9, including $27.2 secured by real estate inventories and $18.0 in unsecured affiliate notes, net of discount. Total liabilities were $57.0 and total equity was $2.5. The company reported $9.7 of debt maturities for the remainder of 2015 and $19.7 in 2016.
Changes, outlook, and risks
- Revenue and margins were pressured by fewer settlements and the mix of homes delivered; management also cited two recently launched projects as a factor in lower margins. Average settlement price increased for the first nine months to $488 from $460, but decreased in Q3 to $502 from $521.
- Management said it was seeking loan extensions and modifications and additional growth capital. It expected cash on hand, settlement proceeds, private-placement proceeds, and successful lender discussions to support operations for the next 12 months, but gave no assurance. The company also said it may reduce costs or defer expenses to conserve cash.
- The company did not meet the minimum liquidity covenant on its secured line of credit for Q3; it obtained a lender waiver on October 27, 2015. The $4.0 line had $3.1 outstanding and matured January 31, 2016. Failure to extend or repay debt could expose substantially all assets to lender liens and foreclosure.
- Subsequent to quarter-end, Comstock paid off a $0.3 mezzanine note and received Nasdaq notices confirming compliance with listing requirements. A 1-for-7 reverse stock split took effect September 25, 2015. The CFO was expected to leave November 25, with the senior vice president of accounting and finance named interim CFO.
- Other notable items: nine-month other income included a $0.7 gain on a derivative associated with the CGF financing and share issuance. The company reported approximately $128 of federal and state net operating losses, subject to potential Section 382 limitations. It reported no material litigation and no amounts drawn on $3.5 of letters of credit or $5.0 of performance and payment bonds.
- Related-party financing and arrangements include unsecured borrowing from an entity managed by the company and an affiliate wholly owned by the CEO; certain project financing is also CEO-guaranteed. The filing reports effective disclosure controls as of September 30 and no material change in internal control during the quarter.
Key investor verification points
- Confirm whether lenders extended or modified the near-term maturities and whether the company maintained covenant compliance after the reported waiver.
- Track cash burn, inventory investment, settlement receipts, and the availability of additional financing against the company’s stated 12-month liquidity expectation.
- Assess whether the higher order activity and backlog convert into settlements and improved homebuilding margins.
- Review the terms, cost, and related-party aspects of affiliate debt and private placements, including repayment requirements and any dilution from equity or warrants.
- Verify the impact of the derivative gain and NHA-related tax adjustment on reported results, and monitor the company’s ability to preserve and use its tax losses.