Comstock Holding Companies, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are with FY2021. The filing was signed March 29, 2023. Comstock (Nasdaq: CHCI) is a Washington, D.C.-area real estate asset manager and developer, emphasizing fee-based, asset-light operations and transit-oriented properties.
Business context and material developments
- The managed portfolio comprised 41 properties: 13 commercial, 6 residential and 22 parking assets. The company also reported a development pipeline of 16 commercial assets, about 3,100 residential units and 2 hotel projects.
- In March 2022, Comstock sold its environmental-services subsidiary, CES, for approximately $1.4 million of stated consideration. CES is reported as a discontinued operation; the sale generated a net loss of about $0.2 million.
- In June 2022, Comstock redeemed all Series C preferred stock held by an entity owned by its CEO, paying $4.0 million cash and issuing 1.0 million Class A shares. The transaction generated a $2.046 million benefit in calculating income attributable to common stockholders.
- Also in June, Comstock entered into a new asset management agreement (2022 AMA) with a CEO-controlled affiliate. The agreement covers the Anchor Portfolio, increases or expands fee opportunities, runs through 2035 subject to renewal and termination provisions, and adds mark-to-market incentive fees.
Financial performance
| Metric | FY2022 | FY2021 | Change / context |
|---|---|---|---|
| Revenue | $39.313 million | $31.093 million | Up 26.4% |
| Operating income | $7.952 million | $5.065 million | Operating margin 20.2%, versus 16.3% |
| Continuing-operations income, before tax | $7.853 million | $4.822 million | — |
| Continuing-operations net income | $7.728 million | $16.039 million | FY2021 included a substantial tax benefit |
| Net income | $7.347 million | $13.609 million | Includes discontinued-operation losses of $0.381 million and $2.430 million, respectively |
| Net income attributable to common stockholders | $9.393 million | $13.609 million | FY2022 includes the $2.046 million preferred-stock redemption effect |
| Adjusted EBITDA (non-GAAP) | $8.994 million | $5.798 million | Up about 55%; see company reconciliation and definition |
| Operating cash flow, continuing operations | $8.397 million | $8.688 million | Down $0.291 million |
- Revenue growth included $3.9 million of incentive fees under the 2022 AMA, higher management and leasing activity, and increased reimbursable staffing charges. These gains were partly offset by a $3.1 million decline in loan-origination fees.
- Operating expenses rose 20.5% to $31.361 million, primarily from higher personnel costs. Cost of revenue was $29.371 million; selling, general and administrative expense was $1.784 million.
- Income-tax expense was $0.125 million in 2022, compared with an $11.217 million tax benefit in 2021. The 2021 benefit was mainly associated with a partial release of the deferred-tax valuation allowance. The company reported $131.7 million of NOL carryforwards.
Cash, debt and liquidity
- Cash and cash equivalents were $11.722 million at year-end, down from $15.823 million. Continuing-operation investing cash flow was negative $2.099 million; continuing-operation financing cash flow was negative $10.068 million.
- Comstock repaid the $5.5 million drawn balance on its affiliate credit facility in September 2022. At year-end, it reported no outstanding debt or financing arrangements with future payments due and $10.0 million available under the facility.
- Total assets were $42.473 million, total liabilities $13.619 million and stockholders’ equity $28.854 million. Operating lease liabilities totaled $7.918 million, including $9.496 million of undiscounted future lease payments.
- Management stated it believed liquidity and available capital were adequate for current operations and commitments. No common-stock dividends were declared, and none were anticipated in the foreseeable future.
Outlook, risks and unusual items
- Management provided qualitative rather than quantified guidance: it said staffing was appropriate for current conditions and that the company would pursue growth opportunities while managing risk in the greater Washington, D.C. region.
- Nearly all revenue depended on related parties: 98.5% of FY2022 revenue and 86.7% of year-end accounts receivable were related-party amounts. The CEO controls the affiliate behind the 2022 AMA and certain property owners; the filing also discloses affiliate leases and other transactions. Independent directors approved the AMA and preferred-stock redemption.
- The $3.9 million incentive-fee revenue depended on asset valuation and contractual triggering events. Management describes the calculation as subjective and potentially volatile; FY2022 recognition related to services performed in prior periods. Additional annual operating-asset triggering events were scheduled through 2024.
- Other stated risks include real estate market conditions, inflation and interest rates, competition, labor and material costs, regulation, development delays, and the ability to raise capital and retain clients. COVID-19 impacts remained uncertain, although the company reported no significant effect to date.
- The company’s unconsolidated real estate investments were carried at fair value using significant unobservable inputs. Maximum loss exposure for each disclosed investment was its carrying amount.
- The auditor issued an unqualified opinion on the financial statements and identified deferred-tax-asset realizability as a critical audit matter. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to audit internal controls.
Important facts for investors to verify
- How much future revenue and cash flow depends on the CEO-affiliated Anchor Portfolio, and what termination or renewal provisions apply to the 2022 AMA?
- What assumptions support incentive-fee valuations and the timing or amount of future fees, including the scheduled triggering events through 2024?
- Are related-party receivables being collected on schedule, and how are the company’s affiliate arrangements reviewed and governed?
- How sustainable are revenue growth and Adjusted EBITDA without prior-period incentive fees, and how should FY2022 earnings be compared with FY2021’s unusually large tax benefit?
- What is the expected realization of the $131.7 million of NOL carryforwards, and could ownership changes limit their use under Section 382?