Comstock Holding Companies, Inc. quarterly report, Q1 FY2014

Comstock Holding Companies, Inc. — Q1 2014 Form 10-Q

Business context and period: Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. Comstock develops homes and provides real estate services, primarily in the Washington, D.C. metropolitan area. Its reportable segments are Homebuilding, Multi-family and Real Estate Services; it reported no Multi-family revenue in either comparative quarter.

Financial and operating performance

Metric	Q1 2014	Q1 2013
Total revenue	$7.954 million	$11.557 million
Homebuilding revenue	$7.831 million	$11.396 million
Gross profit	$1.605 million	$2.540 million
Operating income (loss)	$(0.824) million	$1.035 million
Consolidated net income (loss)	$(0.843) million	$1.062 million
Net income (loss) attributable to Comstock	$(1.579) million	$0.723 million
Basic and diluted EPS	$(0.08)	$0.04 basic; $0.03 diluted
Operating cash flow	$(2.591) million	$4.079 million

Revenue declined about 31%; management attributed the decrease mainly to fewer home settlements and a less favorable unit mix. Settlements were 19 versus 21, and average settlement price was $412,000 versus $543,000.
Homebuilding gross margin was 20.1%, down from 22.8%. Homebuilding gross profit was $1.575 million versus $2.419 million.
Net new orders were 32 versus 33. Net new order revenue was $14.005 million versus $15.194 million; average gross new order price was $440,000 versus $469,000.
Backlog increased to 41 units and $18.517 million of revenue from 21 units and $9.219 million a year earlier. Average backlog price was $452,000 versus $439,000.
Sales and marketing expense rose to $538,000 from $446,000, and general and administrative expense rose to $1.889 million from $1.555 million. Management linked the increases to more active developments and additional full-time employees.
Q1 2013 included a $722,000 impairment reversal related to the Eclipse project; there was no comparable reversal in Q1 2014.

Balance sheet, debt and liquidity

At March 31, cash and cash equivalents were $7.363 million, down from $11.895 million at December 31, 2013. Restricted cash was $2.764 million, compared with $2.458 million. Real estate inventories were $41.075 million, up from $39.843 million.
Total assets were $54.110 million; total liabilities were $37.790 million; total equity was $16.320 million. The filing does not present a classified current-liability subtotal or a current ratio.
Total notes payable were $30.507 million, up from $29.968 million. This comprised $23.481 million secured by real estate, $4.575 million of unsecured affiliate debt, and $2.451 million of other unsecured debt. Debt fair value was estimated at $28.684 million.
Scheduled maturities and/or curtailment obligations were $10.720 million in 2014, $12.761 million in 2015, $4.575 million in 2016 and $2.451 million in 2018. Secured acquisition and development loans mature from May 2014 to December 2015, subject to stated extension conditions.
Construction facilities had approximately $17.0 million of unused commitments at quarter-end, subject to borrowing-base and other provisions. Construction borrowings carried a 5.3% weighted-average rate; acquisition and development loans carried a 4.8% weighted-average rate. Mezzanine loans bore rates of 12% and 13.5%.
Operating activities used $2.591 million, versus providing $4.079 million in Q1 2013; management cited inventory investment and weather-related project delays. Financing activities used $1.830 million, primarily reflecting $2.117 million of distributions to non-controlling interests. Cash decreased by $4.532 million during the quarter.
Management said it expected available cash, settlement proceeds, debt, project-level equity raises and cash from new-community settlements to provide sufficient resources to service debt, invest and cover overhead/working capital for the next 12 months. This outlook depends on those funding and operating sources; it is not quantified guidance.

Management commentary, risks and contingencies

Management said adverse weather delayed development and construction, contributing to lower settlements and margins. It also noted the homebuilding business is seasonal, with order activity generally strongest in spring and summer and more deliveries and cash receipts typically in the second half.
The company reported approximately 474 building lots owned or controlled under purchase options in its overview; its community table separately listed 657 estimated units at completion, 183 units settled, 41 in backlog and 433 owned unsold lots. These are different measures as presented in the filing.
Approximately $118.5 million of federal and state net operating losses remained, representing about $46 million of potential tax savings at current statutory rates; unused amounts begin expiring in 2028. Deferred tax assets were subject to valuation allowances. A $74,000 tax provision was recorded for Q1 2014, with none in Q1 2013.
Letters of credit were $5.7 million at March 31, 2014, compared with $0.1 million a year earlier; performance and payment bonds were $0.8 million versus $1.0 million. None had been drawn. The company cautioned that a default claim could be material.
No material legal proceedings were reported. The company disclosed ongoing ordinary-course litigation exposure and contractual commitments associated with letters of credit and bonds.
Related-party arrangements include a headquarters lease from an entity wholly owned by the CEO, services billed to a CEO-owned affiliate, and $4.575 million of unsecured debt owed to a CEO-owned affiliate. Certain private-placement investors included directors and former or current officers; Class B members were entitled to a cumulative preferred return of 20% annually, compounded.
Subsequent events included distributions to non-controlling interests, a May 6 amendment extending a Yorkshire loan maturity to May 7, 2015, and the May 9 announcement that President and COO Gregory V. Benson had resigned effective May 5. Separation terms were still under negotiation.
Management identified risks including market and interest-rate conditions, debt service, access to capital, land and construction costs, labor and materials availability, approval delays, regulation, government spending and reliance on key employees and affiliates. Disclosure controls were assessed as effective at March 31, 2014; no material internal-control change was reported during the quarter.

Important facts for investors to verify

Whether the backlog converts to settlements as planned, given that Q1 settlements and average settlement prices fell year over year.
Availability and terms of financing and project-level equity, and the company’s ability to meet the $10.720 million of 2014 maturities or curtailments.
Whether operating cash generation improves after the quarter’s inventory investment, distributions and weather-related delays.
The economics and cash-flow implications of the 20% preferred returns, related-party debt and other CEO-affiliate transactions.
Potential exposure under the $5.7 million of letters of credit and outstanding bonds, and the status of the COO’s negotiated separation terms.