Comstock Holding Companies, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Unless stated otherwise, amounts below are in millions of dollars. The company is a Washington, D.C.-area real estate developer and services provider, with homebuilding, apartment buildings and real estate services segments. It changed its name from Comstock Homebuilding Companies, Inc. on June 22, 2012.
Financial results and position
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Total revenue | $4.244 | $5.903 | $8.179 | $10.489 |
| Operating loss | $(3.089) | $(1.793) | $(5.458) | $(2.912) |
| Loss from continuing operations | $(1.879) | $(1.506) | $(3.307) | $(2.349) |
| Net income (loss) attributable to Comstock | $(3.115) | $(1.676) | $0.836 | $(2.701) |
| Net income (loss) per share | $(0.15) | $(0.09) | $0.04 | $(0.15) |
Q2 gross profit was $0.199 million, about 4.7% of revenue; first-half gross profit was $0.316 million, about 3.9%. These calculated margins reflect the reported segment revenue and gross profit. First-half reported net income was driven by a $6.466 million gain on the March sale of Cascades Apartments, reported in discontinued operations; continuing operations remained loss-making.
- Revenue mix and activity: Homebuilding revenue rose to $3.766 million in Q2 from $3.120 million, and to $6.952 million for the first half from $6.139 million. “Other” revenue fell to $0.478 million in Q2 from $2.783 million and to $1.227 million for the first half from $4.350 million, reflecting completed contracting projects and lower rental activity. First-half homes delivered increased to 29 from 20. At June 30, backlog was 8 units, representing $1.5 million of revenue.
- Costs and margins: SG&A increased to $2.096 million in Q2 and $3.982 million for the first half. Expenses for interest, real estate taxes and indirect costs on inactive projects rose to $1.192 million in Q2 and $1.792 million for the first half. Management attributed pressure on homebuilding and other gross profit in part to declining rental revenues, fixed costs and repairs and maintenance.
- Cash flow: First-half operating cash use was $1.049 million, compared with $2.816 million provided in the prior-year period. Investing activities provided $18.400 million, primarily from the Cascades sale; financing activities used $15.979 million, largely for debt repayment and repayment of the project’s non-controlling investors. Cash and cash equivalents increased to $7.011 million from $5.639 million at year-end. Restricted cash was $3.114 million.
- Debt and liquidity: Total debt was $16.833 million at June 30, down from $29.815 million at December 31, 2011. Total liabilities were $19.891 million, total assets $31.029 million, and shareholders’ equity $11.138 million. The filing lists $7.678 million of debt maturities or curtailment obligations in 2013. The new $9.96 million Eagle Bank loan has a 27-month term and requires a minimum $4.98 million principal curtailment within 12 months of closing, in addition to interest and settlement-related curtailments.
Material changes, outlook and risks
- On March 7, 2012, the company sold its 103-unit Cascades Apartments project for $19.35 million. It reported a $6.466 million gain and approximately $4.7 million net proceeds after debt repayment and retirement of the project investors. Escrowed sale proceeds included $0.300 million for warranty work and $0.650 million for claims.
- On May 29, 2012, the company obtained the Eagle Bank refinancing for its Eclipse and Penderbrook projects and repaid the SunBridge loans. The new facility includes an interest-reserve escrow and principal curtailment requirements.
- Management said available cash, settlement proceeds and expected home settlements should provide sufficient resources for operations over the next 12 months, but cautioned that there is no assurance it can raise additional capital. The company was in discussions with lenders and potential equity investors.
- Management expects rental-related gross profit pressure to continue as units at Penderbrook and Eclipse are absorbed. It reported improved recent market conditions in the Washington, D.C. area, but noted deterioration could cause further impairment charges. No impairment charges were recorded in the first half; project valuations depend on estimated sales prices, sales pace and a 13% discount rate.
- Other risks include substantial debt and ability to service it, real estate market and interest-rate changes, access to capital, land and construction costs, and regulatory and operating risks. Performance and payment bonds totaled $2.007 million at June 30; none had been drawn, but a default claim could materially affect results or liquidity. No material legal proceedings were reported.
- The company carries approximately $106 million of federal and state net operating losses, with a full valuation allowance on deferred tax assets. A Section 382 ownership change could limit use of the tax losses; the company has a stockholder rights plan intended to help preserve them.
- Subsequent events: the company completed a $0.550 million initial Eastgate One lot purchase on July 20, 2012, with further scheduled takedowns; on July 24, it extended the $5.008 million Stonehenge affiliate note maturity to July 20, 2013. The CEO-owned affiliate is the lender.
Most important facts for investors to verify
- Whether continuing operating losses and weak gross margins improve, especially as rental units are sold and other-services revenue remains lower.
- The company’s ability to meet the Eagle Bank curtailment and other near-term debt obligations, and to secure capital or generate cash from settlements.
- Whether the Cascades sale escrows are released without claims and how proceeds and debt repayments affect liquidity.
- Key assumptions behind the Eclipse and Penderbrook valuations, including sales pace, pricing and discount rate, and the potential for future impairment.
- The terms and governance implications of related-party arrangements, including the Stonehenge debt and CEO-affiliated transactions.