Comstock Holding Companies, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts below are in millions of dollars unless otherwise noted. The company manages, invests in and develops mixed-use and transit-oriented real estate, primarily in the Washington, D.C. region. It sold its Comstock Environmental Services subsidiary (CES) on March 31, 2022; CES is presented as a discontinued operation.
Financial performance
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $12.8 | $10.2 | $30.0 | $23.3 |
| Operating income | $3.9 | $3.1 | $6.4 | $4.1 |
| Net income from continuing operations | $3.7 | $3.1 | $6.4 | $15.1 |
| Net income (loss), including discontinued operations | $3.6 | $2.9 | $6.0 | $14.4 |
| Adjusted EBITDA (non-GAAP) | $4.1 | $3.3 | $7.1 | $4.6 |
Revenue increased 26.1% in Q3 and 28.6% for the first nine months. Management attributed growth to portfolio expansion, higher staffing reimbursements and $3.9 million of incentive fees recognized in Q3. These gains were partly offset by lower loan origination fees compared with the 2021 Reston Station refinancing. Cost of revenue rose 24.7% in Q3 and 21.0% for nine months, primarily reflecting higher personnel costs. Calculated gross margin (revenue less cost of revenue) was approximately 34.9% in Q3 2022 versus 34.1% in Q3 2021, and 26.3% versus 21.7% for nine months.
Q3 diluted EPS was $0.36, versus $0.32; nine-month diluted EPS was $0.86, versus $1.59. The prior-year nine-month result included an $11.3 million deferred-tax valuation allowance release. The 2022 nine-month common-stockholder earnings included a $2.0 million accounting benefit from redeeming preferred stock below its carrying value; reported net income attributable to common shareholders was $8.1 million, compared with total net income of $6.0 million.
Cash, debt and liquidity
- Cash was $5.4 million at September 30, 2022, down from $15.8 million at December 31, 2021.
- Nine-month operating cash flow was $1.9 million, compared with $3.1 million in 2021. Investing activities used $1.9 million; financing activities used $10.1 million, including repayment of the $5.5 million affiliate credit-facility balance and $4.0 million cash paid in the preferred-stock redemption.
- The $5.5 million facility balance was repaid in full on September 30; the $10.0 million facility remained available. The filing identifies no outstanding drawn debt at period-end. The facility bears interest at prime plus 1%; its reported effective rate was 7.25% at September 30.
- Total assets were $39.6 million and stockholders’ equity was $27.3 million at September 30. Current assets were $13.4 million and current liabilities $5.8 million.
Material developments, outlook and risks
- On June 13, the company redeemed all Series C preferred stock held by CP Real Estate Services, an entity owned by CEO Christopher Clemente, for $4.0 million cash and 1.0 million Class A shares. The transaction retired the preferred shares and increased shares outstanding.
- On the same date, the company entered a new asset management agreement with Comstock Partners, an entity controlled by the CEO and family members, replacing the prior agreement. The company’s revenue is highly related-party dependent: related parties accounted for $29.5 million of $30.0 million nine-month revenue. Investors should review the agreement’s fee structure, incentive provisions, duration and termination terms.
- The $3.9 million Q3 incentive fee related to services performed in prior periods and an operating-asset trigger scheduled for October 1, 2022. Management says fees are recognized only when material uncertainties are substantially resolved and a significant reversal is not probable; the amount depends on estimated asset values and other variable inputs. Further operating-asset triggers are scheduled annually through 2024.
- Management said it believes liquidity is adequate, the company is staffed for current and foreseeable conditions, and it intends to pursue growth as market conditions warrant. No quantified financial guidance was provided. Management noted uncertainty about longer-term commercial real estate and COVID-19 effects.
- Unconsolidated real estate investments totaled $7.2 million and include fair-value estimates using significant unobservable inputs. The company also cited higher interest rates. It reported ordinary-course litigation but did not expect a material adverse effect. Disclosure controls were deemed effective; no material changes in internal control were reported.
Important facts for investors to verify
- Whether related-party fee arrangements and the concentration of revenue with related parties are sustainable, and how the independent directors oversee these transactions.
- The assumptions and valuation inputs supporting the $3.9 million incentive fee, including the scheduled trigger and potential future fees.
- Cash needs and working-capital trends: receivables increased substantially, and operating cash flow declined year over year.
- The ongoing impact of the CES sale and whether continuing-operations growth offsets the loss of the divested business.
- Real estate venture valuations, potential distributions, and the availability and cost of the undrawn affiliate credit facility.