Comstock Holding Companies, Inc. — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021; comparisons are with FY2020. The filing was signed March 31, 2022. Unless noted, financial amounts are in millions of dollars.
Business context
Comstock is a Washington, D.C.-area real estate asset management and services company focused on mixed-use and transit-oriented properties. Its fee-based services include asset, property and construction management, leasing, capital markets and parking. At year-end, its managed portfolio included 34 operating assets and 18 development pipeline assets. The company’s strategy is asset-light, but its Anchor Portfolio is managed under a long-term agreement with an entity owned by its CEO.
CES, the environmental-services business, was classified as discontinued operations. Comstock completed its sale on March 31, 2022, for approximately $1.4 million of consideration: $1.0 million cash and $0.4 million in escrow, subject to adjustments.
Financial performance
| Metric | FY2021 | FY2020 | Change / context |
|---|---|---|---|
| Revenue | $31.1 | $22.5 | Up 38.3% |
| Operating income | $5.1 | $2.7 | Operating margin 16.3%, up from 11.8% |
| Income from continuing operations before tax | $4.8 | $2.2 | Up from prior year |
| Income tax benefit | $11.2 | Expense of $0.03 | Primarily reflected a partial release of valuation allowance |
| Net income from continuing operations | $16.0 | $2.1 | Materially affected by the tax benefit |
| Net income (loss) from discontinued operations | ($2.4) | ($0.1) | FY2021 includes $1.7 of goodwill impairment |
| Consolidated net income | $13.6 | $2.1 | Basic EPS $1.66; diluted EPS $1.50 |
| Adjusted EBITDA (non-GAAP) | $5.8 | $3.4 | Company-defined measure |
Asset management revenue was $22.5 million, property management $6.9 million and parking $1.6 million. Revenue growth reflected higher base and loan-origination fees, reimbursed payroll costs and seven additional managed properties and parking facilities. Cost of revenue rose 33.6% to $24.6 million, mainly from payroll, co-broker fees and rent. Cost of revenue was about 79.3% of revenue, versus 82.0% in FY2020.
Continuing-operations operating cash flow was $8.7 million, compared with $3.6 million in FY2020. Investing cash flow was $1.3 million and financing cash flow was negative $0.2 million. Including discontinued operations, cash increased $8.8 million to $15.8 million.
Balance sheet and liquidity
At December 31, 2021, cash and cash equivalents were $15.8 million, total assets $43.6 million, and total liabilities $18.3 million. Debt was $5.5 million, consisting of an affiliate-provided credit facility; the amount is due in 2023. The $10 million facility had $4.5 million of available borrowing capacity and an interest rate based on WSJ Prime plus 1%. Management stated it believed liquidity and capital were adequate for current operations and existing debt commitments.
Operating lease liabilities totaled $7.4 million, with $8.9 million of future lease payments before $1.5 million of imputed interest. Series C preferred stock had a stated aggregate liquidation preference of $17.2 million. The company paid no common dividends and did not expect to do so in the foreseeable future.
Material changes, outlook and risks
- Revenue increased 38.3%; operating income nearly doubled. Net income growth was not solely operational: the $11.2 million income tax benefit followed a partial release of the valuation allowance on deferred tax assets.
- Comstock reported approximately $139 million of NOL carryforwards, some beginning to expire in 2027. Their use may be limited by an ownership change under Section 382; the company has a rights agreement scheduled to expire in 2025.
- Management provided no quantified revenue, earnings or cash-flow guidance. It said it was staffed for foreseeable conditions and intended to pursue growth as market conditions warrant. It viewed the Anchor Portfolio as positioned to withstand potential COVID-19 effects, while acknowledging uncertainty.
- Key disclosed risks include real estate and interest-rate conditions, competition, labor and material costs, development and regulatory hurdles, COVID-19, access to capital and reliance on client and affiliate relationships. The company said 99.3% of FY2021 revenue came from related parties.
- Related-party dependence and governance merit attention: the CEO owns or controls counterparties to the Anchor Portfolio agreement, the credit facility and certain investments and leases. The 2019 asset management agreement is scheduled through 2027 and provides for termination payments, but its performance and renewal remain relevant to revenue stability.
- The company recorded $1.7 million of CES goodwill impairment in FY2021. No material legal proceedings were reported. The auditor issued an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- How recurring and sustainable are the asset-management fees, and what portion depends on the CEO-affiliated Anchor Portfolio and other related parties?
- What assumptions support realization of deferred tax assets and NOL carryforwards, and could future results require a renewed valuation allowance?
- What final proceeds were received from the CES sale after escrow and working-capital adjustments?
- How will development pipeline timing, leasing, costs and additional investments affect future cash flow and funding needs?
- Confirm the affiliate credit facility’s terms, related-party agreement protections and the preferred stock’s liquidation rights.