Comstock Holding Companies, Inc. annual report, FY2012

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Business context and reporting period

Comstock Holding Companies, Inc. filed this annual report for the fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. The company develops homes and apartments and provides real estate services, principally in the Washington, D.C. metropolitan area, through Homebuilding, Apartment Buildings and Real Estate Services segments. Amounts below are in millions unless stated otherwise.

Financial and operating performance

  • Revenue: $14.3 in 2012, down 34.8% from $21.9 in 2011. Homebuilding revenue was $11.6 versus $14.1; other revenue was $2.7 versus $7.9.
  • Profitability: Operating loss widened to $12.0 from $7.8. Continuing-operations net loss was $9.5, compared with income of $2.1 in 2011. Including discontinued operations, net loss attributable to Comstock was $5.7, or $0.28 per share, versus net income of $1.1, or $0.05 per share.
  • Discontinued operation and unusual gain: The March 2012 sale of the Cascades Apartments generated a $6.5 gain before tax and $3.9 of net income from discontinued operations. This gain substantially offset the continuing-operations loss.
  • Margins and sales: Homebuilding gross margin rose to 16.4% from 13.5%. Deliveries fell to 45 units from 48, while average revenue per delivered unit declined to approximately $259,000 from $293,000. Net new-order revenue increased to $16.4 from $14.1; year-end backlog rose to $5.4 on 9 units from $0.6 on 3 units.
  • Cash flow: Operating cash flow was negative $16.0, versus positive $12.7 in 2011. Investing activities provided $18.9, primarily from the Cascades sale; financing activities used $5.0. Year-end cash was $3.5, down from $5.6.
  • Liquidity and debt: Restricted cash was $3.2, including a $3.0 insurance deposit not currently accessible. Total debt at year-end was $27.6, versus $29.8 in 2011; total liabilities were $32.3 and shareholders’ equity was $6.4. The filing lists $14.0 of 2013 maturities or curtailments before subsequent extensions and financing changes.
  • Assets and impairment: Real estate held for development and sale increased to $27.8 from $21.2. A $2.4 impairment was recorded in 2012, principally reflecting a revised plan to market Potomac Yard for a bulk sale; there was no impairment charge in 2011.
  • Fourth quarter: Revenue was $2.6 and net loss attributable to Comstock was $2.0, or $0.10 per share.

Changes versus 2011

  • Revenue declined as general-contracting work wound down and rental revenue fell with condominium-unit sales at Penderbrook and Eclipse.
  • Homebuilding revenue decreased despite higher net orders and backlog; fewer units were delivered and the product mix reduced average revenue per delivery.
  • SG&A increased to $8.7 from $7.4, including higher consulting costs and stock compensation. The company also recorded the $2.4 real-estate impairment.
  • Cash generation shifted from positive operating cash flow to a $16.0 outflow, reflecting development and land spending and other working-capital movements. Debt decreased overall, but substantial near-term maturities remained at year-end before subsequent actions.

Outlook, risks and notable matters

  • Management outlook: The company said it expected available cash, the subsequent private placement and settlement proceeds to support operations for the next 12 months, but gave no assurance. Planned activity included 2013 sales and development at The Hampshires, Eastgate, Falls Grove and Shady Grove; BLVD Newell remained dependent on rezoning and permits. No formal earnings or revenue guidance is provided.
  • Subsequent financing: In March 2013, Investors VII raised $6.925 of up to $7.0, with investors entitled to a 20% cumulative compounded preferred return. The filing also describes new Eagle Bank and secondary loans for Shady Grove and an extension of the Stonehenge affiliate note to January 2016. Management reported that extensions and new facilities shifted $13.291 of the $14.027 in stated 2013 maturities or curtailments to 2015 and later.
  • Funding and execution risks: The business depends on construction and development financing, project sales, mortgage availability and continued access to capital. Development delays, cost inflation, labor or material constraints, weak housing demand, weather and competition could impair cash flow and margins.
  • Concentration and approvals: Operations are concentrated in the Washington, D.C. market. BLVD Newell requires government approvals, and the company cautioned that approval is not assured.
  • Debt and related parties: Some facilities are secured and/or guaranteed by the company; certain financing involves the CEO or other insiders. The company leases its headquarters from a CEO affiliate and reported related-party service revenue, including $1.4 for a project owned by a CEO affiliate in 2012.
  • Other unusual items: A fourth-quarter correction of a prior-period stock-compensation accounting error increased 2012 net loss by $176; management said the adjustment was not material to the affected prior periods or 2012. The company reported no material pending legal proceedings. Letters of credit and performance/payment bonds totaled approximately $1.7, with no amounts drawn at year-end.
  • Governance and controls: Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The CEO and COO together held approximately 78% of combined voting power as of March 27, 2013, principally through high-vote Class B shares.

Important facts for investors to verify

  1. Confirm the status, terms, repayment schedules and collateral for the 2013 private placement, Shady Grove financing and debt extensions, including the 20% preferred return and guarantees.
  2. Assess whether projected cash from home settlements and new projects can cover operating needs and debt service; distinguish unrestricted cash from restricted deposits.
  3. Review the assumptions behind the Potomac Yard impairment and bulk-sale strategy, and whether a sale was completed on expected terms.
  4. Track backlog conversion, deliveries, pricing and margins, as well as the decline in general-contracting and rental revenue.
  5. Evaluate the permitting path and development financing for BLVD Newell and other projects, along with exposure to the single Washington-area market.
  6. Review related-party arrangements, insider voting control, potential share dilution and the company’s ability to preserve and use its tax-loss carryforwards.