Comstock Holding Companies, Inc. - 10-Q Summary (Period Ended Sep 30, 2010)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2010, for Comstock Homebuilding Companies, Inc. (Comstock), a real estate developer and homebuilder focused primarily on the Washington, DC metropolitan area. The company is a smaller reporting company. Following a "Strategic Realignment Plan" initiated in 2009, Comstock has exited the Atlanta, Raleigh, Charlotte, and Myrtle Beach markets, deconsolidating those assets as discontinued operations. The company currently operates only in the Washington, DC market, focusing on selling existing inventory and converting unsold units to rentals to generate cash flow.
Key Financial Metrics
| Metric | 9 Months Ended Sep 30, 2010 | 9 Months Ended Sep 30, 2009 |
|---|---|---|
| Total Revenue | $21.2 million | $19.4 million |
| Net Loss | $(6.2) million | $(28.1) million |
| Operating Loss | $(7.2) million | $(21.4) million |
| Cash from Operations | $14.2 million | $9.5 million |
| Total Debt | $30.0 million | $67.6 million (Dec 31, 2009) |
| Cash & Equivalents | $0.8 million (Unrestricted) | $1.1 million (Dec 31, 2009) |
| Restricted Cash | $3.1 million | $3.2 million (Dec 31, 2009) |
Margins: Homebuilding gross margin was negative for the period due to high costs of sales relative to revenue (Cost of sales was 101.8% of homebuilding revenue for the nine months). The company recorded an impairment charge of $1.5 million in Q3 2010.
Material Changes vs. Prior Period
- Debt Reduction: Total debt decreased significantly to $30.0 million from $67.6 million at year-end 2009, driven by a troubled debt restructuring with Stonehenge Funding (a related party) and the deconsolidation of Wachovia-related assets.
- Discontinued Operations: The company deconsolidated its Southeast region (Atlanta and Raleigh) effective January 1, 2010, due to the adoption of new accounting standards (ASC 810). This resulted in a $0.9 million gain on deconsolidation recorded in opening retained earnings.
- Revenue Mix: While homebuilding revenue remained relatively flat year-over-year ($16.8M vs $17.1M), "Other revenue" increased to $4.4M (from $2.3M), largely due to a $2.8M land sale in Q1 and rental income.
- Profitability: Net loss improved substantially to $(6.2) million from $(28.1) million, primarily due to the elimination of discontinued operations losses and reduced operating expenses.
Guidance, Outlook, and Risks
Outlook: Management anticipates generating sufficient cash to sustain operations through 2010 via settlement proceeds, rental operations, and land sales. However, this is contingent on meeting minimum settlement quotas at the Penderbrook and Eclipse projects. Failure to meet these quotas would allow lenders to retain substantially all settlement proceeds for debt curtailment.
Liquidity Risks: The company has limited access to external working capital. Unrestricted cash is only $0.8 million. A significant portion of cash ($3.0 million) is restricted as security for insurance claims. The company faces substantial debt maturities in 2011 ($20.0 million).
Legal Contingencies: Comstock obtained a $12.0 million judgment against general contractor Balfour Beatty in March 2010. Balfour has appealed and posted a bond. If upheld, a significant portion of this award must be applied to principal curtailment on the KeyBank loan.
Unusual Items: The company recorded a $7.7 million gain on troubled debt restructuring with Stonehenge Funding in Q1 2010, which was treated as a capital contribution rather than income.
Investor Verification Checklist
- Sales Quotas: Verify if the company continues to meet the minimum cumulative settlement requirements at Penderbrook and Eclipse to retain cash flow from sales.
- Debt Maturities: Confirm the status of refinancing or extension negotiations for the $20.0 million in debt maturing in 2011.
- Balfour Judgment: Monitor the appeal status of the $12.0 million judgment against Balfour Beatty and its potential impact on KeyBank debt reduction.
- Restricted Cash: Assess the likelihood of accessing the $3.0 million restricted cash held as insurance security.
- Impairment Assumptions: Review the 13% discount rate and sales pace assumptions used in the discounted cash flow models for real estate held for sale.