Comstock Holding Companies, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; balance-sheet comparisons are to December 31, 2017. Amounts are in millions of dollars unless otherwise noted.
Business context
Comstock is a mid-Atlantic real estate development and services company. In 2018, it began shifting from on-balance-sheet, for-sale homebuilding toward asset management, commercial development and real estate services. Its three reported segments are Homebuilding, Asset Management and Real Estate Services. Management expected to largely wind down on-balance-sheet homebuilding by the second quarter of 2019, while continuing residual land development and lot sales beyond 2019.
The asset-management platform is anchored by a master asset management agreement (AMA) with Comstock Development Services, an entity wholly owned by the CEO. The agreement became effective January 2, 2018, runs through 2022 initially, and provides for cost reimbursement plus a fixed annual $1.0 million fee. The related-party agreement and dependence on the CEO’s affiliated portfolio are important considerations.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $14.9 | $13.8 | $38.0 | $34.6 |
| Operating loss | $(2.1) | $(1.2) | $(4.1) | $(2.4) |
| Net loss | $(1.6) | $(1.2) | $(3.1) | $(2.4) |
| Net loss attributable to common stockholders | $(1.9) | $(1.5) | $(3.7) | $(0.8) |
| Basic and diluted loss per share | $(0.52) | $(0.45) | $(0.99) | $(0.25) |
- Revenue mix: Q3 homebuilding revenue was $11.5 million, down from $13.1 million; asset-management revenue was $2.7 million, with no comparable 2017 revenue; and real estate services revenue was $0.7 million versus $0.7 million. Nine-month homebuilding revenue was $27.8 million versus $33.4 million, asset-management revenue was $8.5 million, and real estate services revenue was $1.8 million versus $1.2 million.
- Margins: Homebuilding gross margin was negative 2.0% in Q3 versus positive 4.5% a year earlier, and negative 3.6% for the nine months versus positive 7.7%. The company reported $1.4 million of Q3 and $2.1 million of nine-month impairments related to four communities. Segment gross profit (loss) for the nine months was $(1.0) million in Homebuilding, $0.9 million in Asset Management, and $0.02 million in Real Estate Services.
- Cash flow: Nine-month operating cash flow was $9.7 million, up from $2.6 million. It benefited principally from a $15.7 million reduction in real estate inventories associated with settlements and land sales; it was not generated by positive earnings. Investing cash outflow was $0.04 million. Financing cash outflow was $7.9 million, reflecting $21.8 million of debt repayments, partly offset by $15.8 million of borrowings.
- Liquidity and balance sheet: September 30 cash and cash equivalents were $3.5 million, with restricted cash of $1.2 million. Total assets were $39.1 million versus $51.2 million at year-end; real estate inventories were $27.0 million versus $44.7 million. Total liabilities were $31.5 million versus $48.5 million, and total equity was $7.6 million. The company reported a parent-company deficit of $8.2 million.
- Debt: Notes payable totaled $23.0 million, down from $39.4 million at year-end. The filing identified $15.5 million of borrowings maturing or subject to curtailment over the following 12 months. As of November 8, 2018, management said all lender obligations had been extended or repaid, while it continued seeking longer-term extensions and modifications.
- Preferred stock and financing transaction: Series C preferred stock had a $14.0 million liquidation preference at September 30. In May, the company exchanged affiliate fund notes for Series C preferred shares; the CGF II note was cancelled, and the CGF note was reduced. The conversions contributed to reported income-tax benefits of $0.4 million for Q3 and $0.9 million for the nine months.
Material changes and management outlook
- Total revenue rose 8% in Q3 and 10% for the nine months, primarily reflecting newly reported AMA revenue. However, operating and net losses widened, and the homebuilding business had fewer settlements: 15 units in Q3 versus 24, and 38 for the nine months versus 72.
- Homebuilding backlog at September 30 was 34 units and $19.1 million, compared with 27 units and $16.4 million a year earlier. Nine-month net new orders were 52 units and $29.7 million, down from 64 units and $32.8 million.
- Management said cash on hand, private placements, home-sale proceeds and successful debt extensions were expected to provide sufficient resources for the next 12 months, but gave no assurance. The filing does not provide numerical earnings or revenue guidance.
- The company attributed lower general and administrative expense partly to lower headcount and overhead savings, and partly to costs being charged to Asset Management under the AMA rather than G&A. It also cited cost savings and the homebuilding wind-down as factors in lower sales and marketing expense.
Risks, contingencies and unusual items
- Debt agreements include financial covenants, curtailment requirements and construction limits. Failure to comply, make required payments or extend loans could trigger defaults and cross-defaults. Management cited ongoing lender discussions and the concentration of near-term maturities.
- The AMA is a material related-party arrangement with an entity wholly owned by the CEO. Investors should assess its terms, revenue recognition, payment collection and the company’s reliance on the CEO-affiliated portfolio. The filing reports $2.5 million of AMA-related deferred revenue and $1.6 million of related-party receivables.
- Impairment charges reflected unsuccessful negotiations and market conditions at four Washington, D.C.-area communities. Homebuilding results also reflected a mix of settlements that included land and multifamily-unit transactions.
- Outstanding letters of credit were $1.0 million and performance bonds were $4.4 million; none had been drawn. The company said it was not subject to material legal proceedings. It reported no material change to previously disclosed risk factors.
- The company had approximately $145 million of federal and state net operating losses, subject to potential ownership-change limitations; substantially all net deferred tax assets had a full valuation allowance. Management reported disclosure controls were effective as of September 30, 2018.
Key facts for investors to verify
- Whether the announced debt extensions and repayments were completed on the stated terms, and what debt maturities, covenants and available borrowing capacity remain.
- Whether AMA fees are collected and sustainable, and how related-party terms and governance safeguards are evaluated.
- Whether operating cash flow remains positive after inventory liquidation slows, given the nine-month dependence on inventory reductions.
- Whether homebuilding settlements, margins, backlog conversion and further impairment exposure support the planned wind-down.
- The economic implications of the Series C preferred stock’s $14.0 million liquidation preference, including its priority relative to common equity.
- The distinction between reported nine-month homebuilding revenue of $27.8 million and MD&A’s $24.9 million figure for unit settlements; the filing explains that the latter excludes $2.8 million recognized from the Momentum | Shady Grove land sale.