Comstock Holding Companies, Inc. quarterly report, Q2 FY2013

Comstock Holding Companies, Inc. — Q2 2013 Form 10-Q

Reporting period: Three and six months ended June 30, 2013; comparisons are to the same 2012 periods. Amounts are in millions unless stated otherwise. Comstock is a Washington, D.C.-area real estate development and services company, reporting Homebuilding, Apartment Buildings, and Real Estate Services segments. Apartment Buildings had no segment revenue in the reported periods.

Financial results and liquidity

Metric	Q2 2013	Q2 2012	Six months 2013	Six months 2012
Total revenue	$12.213	$4.244	$23.770	$8.179
Operating income (loss)	$(0.017)	$(3.089)	$1.022	$(5.458)
Net income (loss), consolidated	$0.114	$(3.115)	$1.176	$0.939
Net income (loss) attributable to Comstock	$(0.838)	$(3.115)	$(0.115)	$0.836
Basic and diluted EPS attributable to Comstock	$(0.04)	$(0.15)	$(0.01)	$0.04

Q2 2013 gross profit was $2.316 million (about 19.0% of revenue); six-month segment gross profit was $4.856 million (about 20.4%). Operating margin was approximately (0.1)% for Q2 and 4.3% for the six months.
At June 30, cash and cash equivalents were $11.411 million, with another $3.575 million restricted. Total assets were $47.683 million, liabilities $31.892 million, and equity $15.791 million.
Total notes payable were $24.578 million, down from $27.629 million at December 31, 2012. This included $19.622 million secured by real estate, $4.956 million of unsecured affiliate debt, and $2.838 million of other unsecured debt. The filing lists $2.496 million of 2013 maturities or curtailments, $4.875 million in 2014, $9.413 million in 2015, $4.956 million in 2016, and $2.838 million thereafter.
For the six months, operating cash flow was $2.825 million, investing cash flow $0.203 million, and financing cash flow $4.844 million; cash increased $7.872 million. Operating cash flow improved from a $1.049 million outflow in the prior-year period.

Changes versus the prior comparable period

Revenue rose 188% in Q2 and 191% for the six months, primarily as home settlements increased and the mix of homes sold changed. Settlements were 22 in Q2 versus 12, and 43 in the first half versus 29.
Homebuilding revenue was $11.987 million in Q2 and $23.383 million for the six months, compared with $3.766 million and $6.952 million, respectively, in 2012. Other revenue declined to $0.226 million in Q2 and $0.387 million for the half, partly because rental units at Eclipse and Penderbrook were sold and general contracting projects were completed.
Q2 operating loss narrowed substantially from $3.089 million to $0.017 million. Six-month operating results moved from a $5.458 million loss to $1.022 million income. Lower costs associated with inactive projects contributed; SG&A increased modestly.
Comstock recorded a $0.722 million impairment reversal in the first half of 2013, reflecting stronger sales activity and a revised disposition strategy for Eclipse. It recorded no such reversal in 2012.
Prior-year results included the Cascades Apartments sale: 2012 first-half discontinued operations included a $6.466 million gain on sale. The apartment property was sold in March 2012, and the company completed sales of the remaining Eclipse and Penderbrook units by June 2013.

Outlook, risks, and notable items

Management anticipated sufficient resources to sustain operations through 2013 using cash on hand, settlement proceeds, and expected settlements at communities under development. This is management’s stated expectation, not formal earnings guidance.
At June 30, the company reported 43 homes in backlog with $18.842 million of revenue, up from 8 homes and $1.494 million a year earlier. It controlled approximately 848 building lots, owned or had options on 547 unsold lots in the project table, and reported 87 gross new orders in the first half, with 10 cancellations.
In March, Comstock Investor VII raised $7.295 million from a private placement. Investors were entitled to a 20% annual compounded preferred return; the company also issued warrants with an aggregate stated fair value of $0.136 million. The filing notes participation by directors and senior officers as well as unaffiliated investors.
Debt includes project-specific facilities, floating-rate borrowings, and company guarantees. A related-party note held by an entity owned by the CEO had $4.956 million outstanding and was extended to January 2016, with $50,000 monthly payments beginning in April 2013.
At June 30, outstanding letters of credit were $3.613 million and performance/payment bonds were $0.986 million; none had been drawn. The company cautions that a call or default could create material liability. It reported no material legal proceedings.
The company had approximately $116 million of federal and state net operating losses, with a stated potential tax-savings value of about $45 million, but maintained a full valuation allowance. A qualifying ownership change could restrict use of the tax attributes.
Key risks cited include housing and economic conditions, interest rates and debt service, access to capital, construction costs and labor availability, land and approval delays, regulation, and ongoing relationships with affiliates. Management reported disclosure controls effective and no material quarterly change in internal control over financial reporting.

Important facts for investors to verify

Whether the backlog converts to settlements on schedule and at prices sufficient to support expected margins and cash generation.
Liquidity and compliance with project-loan maturity, curtailment, sales, and settlement conditions, including the concentration of 2015 debt obligations.
The terms, cash cost, and potential repurchase obligations associated with the 20% preferred return on the Investor VII interests.
The extent of guarantees, letters of credit, performance bonds, and related-party financing or transactions.
Whether the impairment reversal, discontinued-operation comparisons, and non-controlling-interest allocations are understood when assessing earnings attributable to Comstock shareholders.