Business context and reporting period
Comstock Holding Companies, Inc. is a real estate development and services company focused on the Washington, D.C. metropolitan area. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2012. Its businesses are Homebuilding, Apartment Buildings and Real Estate Services. Amounts below are in millions of dollars unless stated otherwise.
Financial results and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $3.483 | $5.308 | $11.662 | $15.797 |
| Operating loss | $(4.485) | $(2.256) | $(9.943) | $(5.168) |
| Net income (loss) attributable to Comstock | $(4.496) | $6.541 | $(3.660) | $3.840 |
| Basic net income (loss) per share | $(0.22) | $0.33 | $(0.18) | $0.20 |
Homebuilding revenue was $2.527 million in Q3 and $9.479 million for nine months. Homebuilding gross margins on units settled were 17% and 14%, respectively, compared with 11% in each prior-year period. Overall gross profit was negative: a $2.112 million loss in Q3 and a $1.796 million loss for nine months, including a $2.358 million impairment charge.
- Nine-month operating cash flow was a use of $5.137 million, versus a source of $11.466 million in 2011. Investing activities provided $18.776 million, principally from the Cascades Apartments sale; financing activities used $14.836 million. Cash and cash equivalents declined $1.197 million to $4.442 million. Restricted cash was $3.200 million.
- At September 30, total assets were $29.092 million and total liabilities $22.094 million; shareholders’ equity was $6.998 million. Debt totaled $18.433 million, including $5.022 million due to an affiliate. The filing does not present a current ratio or a clear current-versus-long-term liability breakdown.
- Debt maturities disclosed were $6.540 million in 2013, $4.275 million in 2014, $3.968 million in 2015 and $3.225 million in 2016 and thereafter; $0.425 million was due in 2012.
Material changes versus prior comparable periods
- Q3 revenue fell 34% year over year; nine-month revenue fell 26%. Management attributed lower “other” revenue mainly to completed general contracting work and reduced rental activity as condominium units were sold.
- The company recorded a $2.358 million impairment in 2012, reflecting revised property disposition assumptions. Management decided to market Potomac Yard for a bulk sale to accelerate liquidity and absorption; it cautioned that a bulk sale was not assured.
- Q3 2011 results included a $9.434 million net legal-settlement gain, helping explain the swing from prior-year profit to 2012 loss. Nine-month 2012 results included a $6.466 million gain on the Cascades Apartments sale, reported in discontinued operations.
- The company sold Cascades Apartments on March 7, 2012 for $19.35 million. It reported approximately $4.7 million in net proceeds after repayment of project debt and retirement of the non-controlling investment. Related apartment operations were presented as discontinued operations.
- Assets declined from $46.379 million at year-end 2011 to $29.092 million, principally alongside the Cascades sale. The company also launched development joint ventures for 110 units at New Hampshire Avenue and 66 units at Eastgate.
Outlook, risks and notable items
- Management expected available cash, settlement proceeds and cash from settlements at new communities to be sufficient to sustain operations for the next 12 months, but gave no assurance and was pursuing lender and equity-investor funding.
- At September 30, the company reported nine units in backlog representing $5.1 million of revenue. Management anticipated New Hampshire Avenue settlements beginning in Q1 2013 and the first six Eastgate units being completed in Q4 2012. These are forward-looking expectations, not guaranteed outcomes.
- New Hampshire Avenue financing included Eagle Bank development and construction revolvers and a $3.0 million mezzanine loan bearing 13.5% interest. The company’s total debt and ability to service it remain key risks. Other stated risks include real estate market conditions, interest rates, access to land and capital, labor and material costs, regulation, competition and affiliate relationships.
- At September 30, performance and payment bonds totaled $1.710 million; no amounts had been drawn. The filing warns that a default or claim could have a material adverse effect. It reported no material legal proceedings.
- The company had approximately $106 million of federal and state net operating losses, but recorded a full valuation allowance against deferred tax assets; use of NOLs could be limited by an ownership change under Section 382.
- Related-party matters include an extended office lease with an affiliate of the CEO, and contracting work on a project owned by a CEO-controlled entity. The filing reports $1.1 million of revenue from that contracting project in the first nine months of 2012.
- Management reported disclosure controls effective as of September 30, 2012 and no material change in internal control over financial reporting during the quarter. No formal earnings guidance was provided.
Most important facts for investors to verify
- Whether the company can generate sufficient cash and complete settlements to meet its stated 12-month liquidity outlook, given operating cash outflow and scheduled debt maturities.
- Progress and realized value from the proposed Potomac Yard bulk sale, and whether the recorded impairment adequately reflects expected proceeds and selling costs.
- Execution, funding, sales pace and required principal curtailments for the New Hampshire Avenue and Eastgate projects.
- The terms, repayment capacity and related-party aspects of affiliate debt, guarantees, leases and contracting arrangements.
- Potential exposure from performance bonds, warranty or escrow claims, and the continued availability of tax-loss carryforwards.