Comstock Holding Companies, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Dollar amounts are in millions unless otherwise noted. Comstock is a Washington, D.C.-area real estate development and construction services company, with Homebuilding, Multi-family and Real Estate Services segments. Multi-family reported no revenue in the periods shown.
Financial performance and position
- Revenue: Q2 total revenue was $10.0 million, down 21% from $12.6 million a year earlier; first-half revenue was $19.7 million, down 14% from $22.9 million. Homebuilding accounted for $9.7 million of Q2 revenue and $19.2 million for the first half.
- Profitability: Q2 net loss was $1.5 million, versus $0.3 million; loss attributable to common stockholders was $2.0 million, or $0.60 per share, versus $0.8 million, or $0.25 per share. First-half net loss was $2.7 million, versus $0.9 million; loss attributable to common stockholders was $3.8 million, or $1.15 per share, versus $1.8 million, or $0.57 per share.
- Margins and expenses: Homebuilding gross margin was about 5% in Q2 and 7% for the first half, compared with about 13% in each 2015 period. Management cited unit mix and higher land and overhead costs in newer communities. First-half G&A declined to $2.9 million from $3.8 million, attributed to lower headcount and overhead savings. Interest and real estate tax expense rose to $0.5 million for the first half from $0.3 million.
- Orders and backlog: First-half net new orders increased to 68 units from 65, but net order revenue declined to $29.9 million from $31.9 million. Settlements fell to 43 from 46. At June 30, backlog was 50 units valued at $21.5 million, versus 43 units and $22.3 million a year earlier.
- Cash flow: First-half operating cash flow was positive $0.6 million, compared with negative $5.6 million, helped by a $3.3 million reduction in real estate inventories. Investing used $0.1 million; financing used $9.6 million, including $18.9 million of debt repayments and $2.7 million of distributions, partly offset by $12.1 million of new borrowings. Cash and cash equivalents fell to $3.4 million from $12.4 million at year-end; restricted cash was $2.8 million.
- Debt and liquidity: Notes payable totaled $38.9 million, down from $45.4 million at December 31, 2015. Total liabilities were $47.3 million against assets of $47.3 million; total equity was only $46,000, while the parent-company deficit was $4.8 million. Debt maturities or curtailments included $12.7 million during the remainder of 2016 and $23.9 million in 2017. The company obtained a waiver after failing its secured line-of-credit minimum-liquidity covenant at June 30.
Changes, outlook and key risks
- Management said lower homebuilding revenue and gross margin reflected fewer settlements and their mix, while lower G&A reflected cost reductions. The company operates in a seasonal business and expects more deliveries and cash receipts in the second half, subject to market and project conditions.
- Management expected available cash, settlement proceeds, private-placement funding and successful debt extensions to support operations for the next 12 months, but gave no assurance. The company was negotiating extensions or modifications for near-term maturities; defaults could accelerate debt and trigger cross-default provisions.
- As of June 30, the company did not meet Nasdaq’s continued-listing alternatives, including the $2.5 million minimum-equity test. On August 15, it reported an aggregate $14.5 million Investors X subscription offering and stated that it had regained compliance with the minimum-equity requirement. The filing separately says $2.5 million of subscription proceeds had been received on that date. Proceeds were intended mainly for two townhouse projects, with some permitted for reimbursement and general corporate purposes.
- On July 20, a $0.2 million Yorkshire project loan was extended from July 23 to October 23, 2016. On July 29, a land-contract dispute was settled: the seller agreed to refund $0.7 million and repurchase four lots; the parties agreed to dismiss the litigation.
- Other items to monitor include related-party financing and transactions, including an affiliate loan bearing 11.1% at June 30 and the CEO-affiliated entity’s participation in the Investors X offering; Series B preferred dividends paid in kind; and $1.9 million of letters of credit and $4.3 million of performance and payment bonds outstanding. No amounts had been drawn on the letters of credit or bonds. The company reported no material ongoing legal proceedings after the settlement.
- Management identified risks including real estate market and interest-rate conditions, access to capital, construction costs and labor availability, permitting delays, debt service and covenant compliance, listing-rule compliance, and affiliate relationships. Disclosure controls were assessed as effective; no material change in internal control was reported.
Most important facts for investors to verify
- Whether the Investors X subscriptions were fully funded, how much cash the company actually received, and the offering’s preferred-return, warrant and repurchase terms.
- Progress and final terms of extensions or modifications for the $12.7 million of 2016 maturities and the $23.9 million scheduled for 2017, including covenant compliance and available borrowing capacity.
- Cash runway and the timing and amounts of project settlement proceeds, distributions, and other cash requirements, given $3.4 million of unrestricted cash and near-zero reported equity.
- Whether backlog converts to settlements and whether homebuilding margins recover from the first-half 7% level.
- How related-party debt, preferred dividends, and new project financing affect interest expense, dilution, and claims on future cash flows.