Comstock Holding Companies, Inc. — Q3 2016 Form 10-Q
Business and period: Real estate development, homebuilding and services company focused on the Washington, D.C. metropolitan area. This unaudited report covers the quarter and nine months ended September 30, 2016; amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $13.103 | $12.288 | $32.787 | $35.169 |
| Operating loss | $(0.854) | $(1.015) | $(3.567) | $(2.744) |
| Net loss | $(0.756) | $(1.023) | $(3.505) | $(1.965) |
| Net loss attributable to common stockholders | $(1.133) | $(1.091) | $(4.938) | $(2.842) |
| Basic and diluted loss per share | $(0.34) | $(0.33) | $(1.49) | $(0.90) |
| Operating cash flow | Not separately provided for the quarter | $(6.222) | $(7.352) |
- Q3 revenue increased 7%, while nine-month revenue fell 7%. Homebuilding accounted for $12.880 million of Q3 revenue and $32.102 million for the nine months.
- Q3 homebuilding gross profit was $0.895 million on $12.880 million of revenue; nine-month homebuilding gross margin declined to 7% from 12%. Management attributed the decline to settlement mix and higher construction and overhead costs in certain communities.
- Q3 general and administrative expense fell to $1.236 million from $1.853 million; nine-month expense declined to $4.151 million from $5.686 million, attributed to lower headcount and overhead savings.
- At September 30, cash and cash equivalents were $2.464 million, restricted cash $2.556 million, and real estate inventories $48.189 million. Total assets were $56.575 million; total liabilities $53.948 million; total equity $2.627 million. The company reported a parent-company stockholders’ deficit of $5.762 million.
- Total notes payable were $41.772 million, down from $45.399 million at December 31, 2015. Scheduled maturities and/or curtailments were $10.038 million for the remainder of 2016, $27.189 million in 2017, and $4.545 million in 2018.
Changes in operations and other key facts
- Q3 settlements rose to 33 homes from 24, but average settlement price decreased to $390,000 from $502,000. Nine-month settlements increased to 76 from 70, while average settlement price declined to $422,000 from $488,000.
- Net new orders declined to 18 units in Q3 from 40; nine-month net orders were 86 versus 105. September 30 backlog was 35 units valued at $16.421 million, compared with 59 units and $29.171 million a year earlier.
- Inventory increased to $48.189 million from $38.223 million at year-end, including land and development costs of $32.527 million. Operating cash use included approximately $10.0 million invested in inventory.
- Cash declined by $9.984 million over the nine months. Financing activities used $3.724 million, including $28.390 million of debt repayments and $4.413 million of distributions to non-controlling interests, partly offset by $24.157 million of borrowings and $5.000 million of contributions.
- Q3 impairment charges and recovery, net, were $0.091 million: the company recorded about $0.8 million of project-related write-offs, partly offset by a $0.7 million refund of a previously written-off land deposit.
Outlook, liquidity, risks and unusual items
- Management said it expected to have sufficient resources to sustain operations for the next 12 months, conditional on successful debt extensions, private-placement capital, available cash and settlement proceeds; it gave no assurance these efforts would succeed. It also cited cost reductions or expense deferrals as possible cash-conservation measures.
- The company was negotiating extensions or modifications for $10.0 million of debt due or subject to curtailment in the remainder of 2016. A secured line of credit had a $2.928 million balance, matured December 31, 2016, and the company received a waiver after failing its minimum-liquidity covenant at September 30. It remained in compliance with the minimum-net-worth covenant.
- After quarter-end, a Yorkshire project loan with $0.2 million outstanding was extended from October 23, 2016 to April 23, 2017. The company also reported an October commitment by its CEO-owned affiliate to invest an additional $9.5 million in Comstock X, bringing that placement to $14.5 million in aggregate subscriptions.
- On October 24, a subsidiary agreed to sell a Rockville, Maryland multifamily property for $3.5 million, with closing expected in Q2 2017.
- Related-party financing and governance are notable: the CEO-owned affiliate participated in private placements and the company leases its headquarters from a CEO-owned entity. Series B preferred stock carries an 8.75% cumulative dividend, paid in kind during the reported period. The CGF affiliate loan carried an 11.3% rate at September 30.
- Outstanding letters of credit were $1.4 million and performance/payment bonds were $4.3 million; none had been drawn. The company reported no material legal proceedings and no material changes to previously disclosed risk factors.
- Principal risks include refinancing and covenant compliance, potential cross-defaults, access to capital, real estate market and interest-rate conditions, construction costs and labor availability, and project approvals. No specific forward financial guidance was provided.
Most important facts for investors to verify
- Whether the company extended or refinanced remaining 2016 maturities and can meet upcoming debt service and covenants.
- Whether liquidity improves as inventory converts to settlements, given lower order activity and a smaller backlog.
- Whether homebuilding margins recover from the nine-month 7% level and whether additional project impairments arise.
- The terms, funding, related-party nature and dilution implications of private placements and preferred stock.
- Whether the expected $3.5 million property sale closes on schedule and provides cash as anticipated.