Business context and reporting period
Comstock Holding Companies, Inc. is a real estate development and construction-services company focused on the Washington, D.C. metropolitan area. This unaudited Form 10-Q covers the three months ended March 31, 2017; comparative results are for the three months ended March 31, 2016. Unless noted, dollar amounts below are in millions.
Financial performance and position
- Revenue: $10.27 million, up 5.8% from $9.71 million. Homebuilding contributed $10.06 million; other revenue was $0.20 million.
- Profitability: Operating loss narrowed to $0.68 million from $1.27 million. Consolidated net loss was $0.66 million versus $1.29 million. Net loss attributable to Comstock was $0.65 million versus $1.72 million. After preferred-stock items, income attributable to common stockholders was $0.29 million, compared with a $1.81 million loss. The 2017 result includes a $1.01 million Series B preferred-stock extinguishment adjustment and $0.08 million of paid-in-kind preferred dividends.
- Margins: Homebuilding gross margin improved to 9.4% from 9.2%. Reported segment gross profit was $0.94 million overall, including a $0.02 million loss in Real Estate Services.
- Cash flow: Operating activities provided $0.53 million, compared with $0.39 million used in the prior-year quarter. Investing used $0.12 million and financing used $2.46 million. Cash and cash equivalents declined $2.06 million to $3.70 million. Restricted cash was $1.52 million.
- Debt and liquidity: Total notes payable were $43.57 million, compared with $43.70 million at year-end; reported fair value was $45.09 million. Total liabilities were $50.52 million and total equity was $5.87 million. The company reported $35.26 million of borrowings with maturities or curtailments due during the remainder of 2017 and was seeking extensions. A secured line of credit had $2.9 million outstanding; the company said it was in compliance with that facility’s financial covenants at quarter-end.
- Home sales indicators: The company settled 25 homes versus 22. Net new orders were 34 versus 35; backlog was 44 homes worth $23.92 million, up from 38 homes worth $16.26 million.
Material changes versus the prior comparable period
- Revenue increased, with homebuilding revenue rising $0.54 million; operating and net losses narrowed. Lower sales and marketing and general and administrative expenses contributed to the improvement.
- Homebuilding settlements rose, while average settlement price declined to $403,000 from $433,000. Average gross new-order price increased to $501,000 from $423,000; cancellations rose to five from three.
- Operating cash flow turned positive, but cash declined, principally reflecting financing outflows, including $1.91 million distributed to redeem Comstock VIII outside investors.
- In March, Series B preferred stock was exchanged for newly created Series C preferred stock, which has discretionary rather than mandatory dividends. The company also agreed to related share repurchases that closed after quarter-end.
Outlook, risks, contingencies, and unusual items
- Liquidity outlook: Management expected available cash, private-placement proceeds, home-settlement proceeds, and successful debt extensions to fund operations for the next 12 months, but cautioned that there was no assurance these efforts would succeed. It also planned continued cost control and possible expense reductions or deferrals.
- Refinancing and covenant risk: Failure to extend maturing loans, meet debt-service obligations, or comply with loan restrictions could trigger defaults; certain agreements include cross-default provisions. The filing reports $35.3 million of 2017 maturities or curtailments.
- Subsequent events: In April, the company repaid $0.8 million on its secured line of credit and extended a $0.2 million construction loan to July 23, 2017. In May, it made a $1.5 million principal curtailment on the Comstock Growth Fund loan.
- Other risks and contingencies: Outstanding letters of credit were $1.1 million and performance/payment bonds were $4.2 million; none had been drawn. The company reported no material legal proceedings and no material changes to the risk factors in its 2016 Form 10-K. It identified general real estate, market, labor/material-cost, approval, capital-raising, debt-service, and affiliate-relationship risks.
- Related parties: The company has significant insider-affiliated financing, including an unsecured Comstock Growth Fund loan with a 10% interest-rate floor, and leases its headquarters from an entity wholly owned by its CEO. The filing reports no off-balance-sheet arrangements.
- Controls: Management concluded disclosure controls were effective at March 31, 2017; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Progress and final terms of extensions or refinancing for 2017 maturities and curtailment obligations, and any related covenant or default developments.
- Cash availability and the company’s ability to convert backlog and new orders into settlements and operating cash, particularly given seasonal cash-flow patterns.
- The sources, terms, and use of insider-affiliated debt and private-placement capital, including subsequent repayments and preferred-stock transactions.
- The accounting and economic impact of the Series B preferred-stock extinguishment adjustment on common-stockholder income, and the future dividend terms of Series C preferred stock.
- Potential exposure from letters of credit, performance bonds, project guarantees, and other contingencies; the filing does not quantify a likely loss.