Comstock Holding Companies, Inc. — Q1 2018 Form 10-Q
Amounts below are in U.S. dollars; financial statement figures have been converted from thousands to millions unless stated otherwise.
Business context and reporting period
The filing covers the three months ended March 31, 2018. Comstock, a mid-Atlantic real estate development and services company, is shifting from for-sale homebuilding toward asset management, commercial development and real estate services. It plans to wind down most on-balance-sheet homebuilding by late 2018 or early 2019, while continuing residual land development and lot sales beyond 2019.
On March 30, the company entered into a Master Asset Management Agreement (AMA), effective January 2, with an entity wholly owned by its CEO. The agreement provides a cost-plus fee, including a fixed annual payment of $1.0 million, and has an initial term through December 31, 2022. The related-party arrangement is central to the new operating strategy.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $8.80 million | $10.27 million |
| Gross profit | $0.59 million | $0.94 million |
| Operating loss | $0.64 million | $0.68 million |
| Net loss | $0.63 million | $0.66 million |
| Net loss attributable to Comstock | $0.72 million | $0.65 million |
| Net income (loss) attributable to common stockholders | $(0.72) million | $0.29 million |
| Cash used in operating activities | $0.05 million | Cash provided: $0.68 million |
- Homebuilding revenue fell 45% to $5.56 million; settlements declined to 8 units from 25, and the homebuilding gross margin fell to 1.2% from 9.6%. Asset management generated $2.79 million of revenue, primarily under the new AMA; real estate services revenue was $0.45 million.
- The company recorded a $0.56 million impairment charge for project-related costs following unsuccessful negotiations and market conditions. General and administrative expense declined to $0.36 million from $1.25 million.
- At March 31, cash and cash equivalents were $0.99 million and restricted cash was $1.21 million. Total assets were $53.30 million, total liabilities $51.18 million, and total equity $2.12 million.
- Total notes payable were $39.46 million, including $22.89 million secured by real estate inventories and $15.35 million owed to affiliates. The filing lists $29.39 million of maturities and/or curtailment obligations during the remainder of 2018.
- Operating cash use reflected a $5.22 million increase in trade receivables, partly offset by higher accounts payable and accrued liabilities. Financing activities used $0.66 million; cash, restricted cash and cash equivalents declined $0.75 million to $2.20 million combined.
Material changes, outlook and risks
- The shift in revenue mix is substantial: homebuilding revenue declined, while asset management revenue began under an agreement with the CEO’s private company. The company invoiced that related party $6.0 million during the quarter, including a $2.5 million deposit; it received $0.8 million and recognized $2.8 million of asset management revenue. A further $3.19 million was recorded as deferred revenue.
- Management said it expects sufficient resources to sustain operations for the next 12 months, conditional on successful debt extensions, private-placement capital, available cash and settlement proceeds; it cautioned there is no assurance. As of May 16, 2018, it reported that lender obligations coming due through that date had been extended or repaid. The CGF affiliate loan, with $11.7 million outstanding at quarter-end, was extended to April 16, 2019; the subsequent-event note reports a revised 3.89% interest rate and issuance of 300,000 Class A shares.
- Debt agreements include operating restrictions and covenants, with cross-default provisions possible. The company obtained a waiver for failure to meet the secured line of credit’s minimum-liquidity covenant at March 31, while reporting compliance with its minimum-net-worth covenant. The CEO has unilateral ability to extend certain affiliate debt.
- Disclosure controls and procedures were assessed as ineffective at March 31 because of a material weakness in internal control over financial reporting related to insufficient accounting resources and expertise. Management reported remediation efforts, including additional staff, training, consultants and review controls, but said effectiveness remained to be tested.
- No material legal proceedings were reported. Outstanding letters of credit were $1.1 million and performance bonds were $4.5 million; none had been drawn. The filing identifies risks including real estate market conditions, interest rates, refinancing and covenant compliance, capital availability, construction costs, approvals, and reliance on affiliate relationships.
Important facts for investors to verify
- Whether the AMA’s related-party fee structure, revenue recognition, collections and ongoing dependence on the CEO-affiliated counterparty are sustainable and appropriately governed.
- Current status, terms and covenants of the $29.39 million of 2018 maturities or curtailments, including the CGF extension and the reported 3.89% rate and share issuance.
- Liquidity runway, including collection of the $3.98 million related-party receivable, conversion of deferred revenue into earned fees, and cash proceeds from home settlements.
- Progress in remediating the material weakness and whether disclosure controls and internal controls are subsequently judged effective.
- Execution of the homebuilding wind-down and performance of remaining projects, including the effect of impairments, low homebuilding margins and slower settlements.