Comstock Holding Companies, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unless otherwise noted, dollar amounts are in millions; financial statements report amounts in thousands.
Business context
Comstock is a mid-Atlantic real estate development and services company. In 2018 it began shifting from for-sale homebuilding toward asset management, commercial development and real estate services, while winding down its on-balance-sheet homebuilding business. Its new operating platforms are Asset Management, Real Estate Services and Homebuilding.
A central element is a master asset management agreement (AMA) effective January 2, 2018, between Comstock subsidiary CAM and CDS, an entity wholly owned by Comstock’s CEO. The agreement runs through December 31, 2022, subject to renewal, and provides for a cost-plus fee covering specified personnel and public-company costs, plus a fixed annual $1.0 million payment. CDS paid a $2.5 million deposit.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $14.3 | $10.5 | $23.1 | $20.8 |
| Operating loss | $(1.3) | $(0.6) | $(2.0) | $(1.2) |
| Net loss | $(0.8) | $(0.5) | $(1.4) | $(1.2) |
| Net income (loss) attributable to common stockholders | $(1.0) | $0.4 | $(1.7) | $0.7 |
| Basic loss (income) per share | $(0.27) | $0.12 | $(0.47) | $0.20 |
Q2 revenue growth reflected $3.0 million of asset management revenue and higher real estate services revenue, partially offset by lower homebuilding activity. For the six months, homebuilding revenue fell to $16.3 million from $20.3 million; asset management contributed $5.8 million and real estate services $1.1 million. Reported homebuilding revenue includes a $2.8 million land conveyance; management’s homebuilding settlements discussion excludes that amount.
Gross profit was a loss of $0.5 million in Q2 2018 versus profit of $1.0 million in Q2 2017; for the first half it was $0.1 million versus $1.9 million. Homebuilding gross margin was negative 7.8% for Q2 and negative 4.7% for the first half, compared with positive 9.9% and 9.7%, respectively, in 2017. The filing attributes weaker margins principally to the number and mix of settlements. First-half impairment charges were $0.8 million, including $0.2 million in Q2, related to two Washington, D.C.-area communities affected by unsuccessful negotiations and market conditions.
Cash from operating activities was $6.9 million in the first half, versus $2.0 million in 2017, largely reflecting a $9.2 million reduction in real estate inventories from settlements and land sales. Investing cash use was $0.05 million and financing cash use was $2.9 million. Cash, cash equivalents and restricted cash totaled $7.0 million at June 30; unrestricted cash was $5.7 million.
Total notes payable were $26.2 million at June 30, down from $39.4 million at year-end 2017. The reduction included exchanges of affiliate debt for preferred stock. Debt maturities or curtailment obligations included $8.7 million during the remainder of 2018 and $15.7 million in 2019. Total liabilities were $34.6 million; total equity, including non-controlling interests, was $11.3 million. The company reported a parent-company stockholders’ deficit of $5.9 million.
Material changes, outlook and risks
- On May 23, Comstock exchanged affiliate notes with $11.4 million of principal and accrued interest for Series C preferred stock issued to CEO-owned entities. The company reported 2.2 million shares issued in the exchanges and recorded a $0.5 million income tax benefit associated with the transactions. The preferred stock has a $5 per-share liquidation value and discretionary dividends.
- Management expects the on-balance-sheet homebuilding wind-down to be largely completed by Q4 2018 or Q1 2019. Residual land development and finished-lot sales may continue beyond 2019; future homebuilding, if pursued, is expected to be off balance sheet on an asset-management basis.
- Management said it expects resources to be sufficient for the next 12 months, conditional on successful debt extensions, available cash and settlement proceeds, and cautioned that there is no assurance. As of August 14, 2018, it said obligations due through that date had been extended or repaid, with longer-term extensions and modifications still being pursued.
- After quarter-end, the company refinanced the $2.0 million Richmond Station mezzanine loan as a development loan maturing initially in 2021, and repaid its $1.8 million secured line of credit.
- Debt agreements impose operating restrictions and financial covenants; noncompliance or failure to extend maturing loans could trigger default and cross-default provisions. The company reported compliance with the secured line’s covenants at June 30.
- The AMA is a material related-party arrangement with the CEO’s wholly owned entity. The filing reports $5.8 million of first-half asset management revenue, $8.5 million invoiced, and $2.8 million deferred revenue at June 30.
- Outstanding letters of credit were $1.1 million and performance bonds were $4.4 million; none had been drawn. The company reported no material pending legal proceedings. It also reported no material changes to the risk factors in its 2017 Form 10-K.
Most important facts for investors to verify
- Progress and terms of extensions or refinancing for remaining debt maturities, including any covenant compliance or default developments.
- Whether the AMA generates durable, collectible cash flows, and how its related-party fees, billings and deferred revenue reconcile.
- Execution and costs of the homebuilding wind-down, remaining project exposure, and the effect of weak or changing settlement mix on margins and inventory values.
- Preferred-stock liquidation rights, dilution and governance implications of the debt exchanges with CEO-affiliated entities.
- Whether operating cash generation can be sustained: first-half cash flow benefited substantially from inventory reductions rather than reported earnings.