Comstock Holding Companies, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts below are in millions unless otherwise noted.
Business context
Comstock provides asset, property, parking, and related real estate management services, primarily in the Washington, D.C. area. Its managed portfolio included 40 operating assets. The company sold its environmental services subsidiary, CES, on March 31, 2022, and reports it as a discontinued operation.
Financial performance and liquidity
- Q2 revenue: $8.47 million, up 33.9% from $6.32 million. Asset management revenue was $5.54 million; property management, $2.19 million; and parking management, $0.74 million.
- Six-month revenue: $17.20 million, up 30.6% from $13.16 million. Management attributed growth principally to portfolio expansion, additional fees, and reimbursable staffing charges.
- Q2 operating income: $1.12 million, versus $0.49 million. Operating margin was approximately 13.2%, compared with 7.8%. Cost of revenue rose 24.2%; total operating expenses rose 26.0%, mainly because of higher personnel costs.
- Net income: Q2 continuing-operations income was $0.71 million, versus $11.65 million a year earlier; six-month continuing-operations income was $2.73 million, versus $12.04 million. Prior-year results included an $11.3 million tax benefit from deferred-tax-asset valuation allowance releases. Q2 income available to common shareholders included a $2.05 million benefit from the preferred-stock redemption discount; reported basic EPS was $0.32, versus $1.37.
- Adjusted EBITDA: $1.39 million in Q2 and $2.99 million for the first half, compared with $0.67 million and $1.28 million, respectively. This is a non-GAAP measure.
- Cash flow: First-half operating cash flow was negative $0.59 million, investing cash flow negative $2.07 million, and financing cash flow negative $4.49 million. Cash declined $7.40 million to $8.43 million, including the $4.0 million preferred-stock redemption payment and investment in real estate ventures.
- Debt and liquidity: The company had $5.5 million outstanding on an affiliate credit facility, classified as current at June 30, 2022 and due in April 2023. It reported $4.5 million of available facility borrowings and said it planned to extend the facility or repay it at maturity. Operating lease liabilities totaled $7.25 million.
Material changes and notable transactions
- On June 13, the company redeemed all Series C preferred stock held by an entity owned by its CEO for $4.0 million cash and 1.0 million Class A shares. The shares were valued at approximately $4.23 million; the $2.05 million discount to the preferred stock’s carrying value was added to income available to common shareholders.
- On the same date, the company replaced its asset management agreement with the CEO-affiliated CPRES with a new agreement with Comstock Partners, also controlled by the CEO and family members. Independent directors unanimously approved both transactions.
- Revenue was highly concentrated in related parties: $8.29 million of Q2 revenue of $8.47 million and $16.93 million of first-half revenue of $17.20 million came from related parties.
- Real estate venture investments increased to $7.46 million from $4.70 million at year-end, including the company’s investment in BLVD Ansel.
- CES was sold for approximately $1.4 million of consideration, including $1.0 million cash and $0.4 million held in escrow subject to adjustments. The company estimated a $0.2 million gain before $0.4 million of transaction costs; final amounts could change as adjustments are settled.
Outlook, risks, and contingencies
Management provided no quantified earnings or revenue guidance. It said it was staffed for current and foreseeable conditions and intended to pursue growth opportunities as market conditions warrant. Management noted uncertainty around COVID-19’s longer-term effects on commercial real estate, while stating the company had not experienced a significant business impact to date. It also cited estimates and assumptions, including those used to value real estate investments and deferred tax assets, as areas where actual results may differ. The company said ordinary-course litigation was not expected to materially affect operations, financial position, or liquidity.
Investor verification priorities
- Review the new CEO-affiliated asset management agreement’s fee formulas, incentive fees, termination provisions, and related-party approvals.
- Assess the sustainability and collection of related-party revenue, given its concentration in reported revenue.
- Confirm the plan to extend or repay the $5.5 million affiliate facility before its April 2023 maturity and monitor available liquidity.
- Track operating cash generation, working-capital needs, and the outcome of CES escrow and purchase-price adjustments.
- Separate recurring operating performance from the prior-year tax benefit and the 2022 preferred-stock redemption accounting effect when comparing earnings.