Comstock Holding Companies, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. The filing covers the three and nine months ended September 30, 2013; amounts below are in thousands of dollars unless stated otherwise. Comstock is a Washington, D.C.-area real estate development and services company, operating in homebuilding, apartments, and real estate services. The Cascades Apartments were sold in 2012 and are presented as discontinued operations. At September 30, 2013, the company reported approximately 657 lots owned or controlled under options.
Financial and operating performance
- Revenue: Q3 revenue was $9,572, up from $3,483 a year earlier; nine-month revenue was $33,342, up from $11,662. Homebuilding generated $9,211 in Q3 and $32,594 year to date. Other revenue was $361 and $748, respectively.
- Profit and margins: Q3 operating income was $406, versus an operating loss of $4,485 in Q3 2012; nine-month operating income was $1,428, versus a loss of $9,943. Pretax income was $447 for Q3 and $1,627 year to date. Consolidated net income was $250 for Q3 and $1,426 year to date, but net loss attributable to Comstock was $739 and $854, respectively, reflecting income attributable to non-controlling interests. Parent-attributable losses were $4,496 and $3,660 in the comparable 2012 periods. Homebuilding gross margin was 25.6% in Q3 and 22.5% year to date, versus 17.2% and 14.0%; excluding the warranty reserve release, the filing reports a 21.3% margin for both 2013 periods.
- Orders and deliveries: Net new orders were 27 in Q3 versus 13, and 104 for nine months versus 47. Settlements were 20 versus 12 in Q3 and 63 versus 41 year to date. Backlog was 50 units valued at $22,470, compared with 9 units and $5,111 a year earlier.
- Cash flow: Nine-month operating cash use was $5,986, compared with $5,137 in 2012. Investing provided $197, versus $18,776, primarily because the prior-year period included proceeds from the Cascades Apartments sale. Financing provided $6,438, compared with $14,836 used in 2012. Cash and cash equivalents rose to $4,188 from $3,539 at year-end 2012.
- Liquidity and debt: At September 30, cash was $4,188 and restricted cash was $3,707. Total notes payable were $26,444, down from $27,629 at December 31, 2012; total liabilities were $35,338 and total assets were $51,149. The filing lists $2,429 of debt maturities or curtailment obligations in 2013 and $8,555 in 2014. Debt includes secured project borrowings, $4,797 due to an affiliate, and $2,709 of unsecured debt. The filing does not provide a classified current-assets/current-liabilities presentation.
- Equity: Total equity was $15,811, including $10,611 of non-controlling interest, compared with total equity of $6,379 at year-end 2012. The increase primarily reflects $7,763 of non-controlling-interest contributions and current-period income attributable to those interests.
Material changes and unusual items
- Revenue growth and improved homebuilding margins reflected more settlements, a higher average settlement price, product mix, and the exit from legacy impaired projects. Q3 average settlement price was $461 versus $211; the nine-month average was $517 versus $231.
- 2013 included a $722 reversal of a previously recorded impairment charge; 2012 included a $2,358 impairment charge. The company said it revised its disposition strategy and sold the remaining Eclipse and Penderbrook units in the first half of 2013.
- Q3 homebuilding cost of sales benefited from a $395 reduction in a warranty estimate following settlement of a claim. Other cost of sales also included a $220 release of contingency reserves related to the Loudoun Station project. These items affect comparability of reported margins.
- 2012 results included a $6,466 gain on the Cascades Apartments sale, reported in discontinued operations. This makes comparisons of total net results with 2013 less representative of ongoing operations.
- In March 2013, Comstock Investor VII raised $7,295 in a private placement. Investors are entitled to a cumulative preferred return of 20% annually, compounded; the company also has a conditional right to repurchase all interests for cash. Related-party participants included directors and senior executives.
Outlook, risks, and contingencies
- Management expected available cash, settlement proceeds, project-level financing and equity raises, and cash from new-community settlements to be sufficient to sustain operations through 2013. This is management’s stated expectation, not a longer-term forecast; no specific earnings or revenue guidance was provided.
- Management cited ongoing discussions with lenders and potential equity investors to fund growth opportunities. The company’s ability to service debt and obtain financing, real estate market conditions, interest rates, approvals and development timing, construction costs, land availability, and affiliate relationships are among the disclosed risks.
- Letters of credit totaled $4,260 and performance/payment bonds totaled $986 at September 30, 2013; none had been drawn. The company cautioned that a default or call could create material liability. It reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
- Several project loans bear variable rates or have principal-curtailment and sales conditions. The Redland loan curtailment schedule was amended in October 2013 to defer the start of required curtailments to March 31, 2014. The filing also discloses substantial related-party financing and lease arrangements.
- Disclosure controls were concluded effective as of September 30, 2013, and the company reported no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether operating cash use, restricted cash, project-level financing, and scheduled debt maturities support the company’s stated ability to fund operations, particularly beyond 2013.
- The full economics and payment priority of the Comstock Investor VII investors’ 20% compounded preferred return, including any repurchase obligations and future distributions.
- How much of 2013 reported homebuilding margin depended on the warranty and contingency reserve releases; the filing’s stated adjusted margin is 21.3%.
- Project-level loan balances, variable interest rates, guaranties, maturity and curtailment requirements, and compliance with sales or settlement conditions.
- The filing describes approximately 657 lots owned or controlled, while its project table totals 446 unsold owned lots and 161 unsold lots under option (607); clarify the scope or basis of these figures.