Comstock Holding Companies, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
Comstock provides real estate asset, property, development, leasing and capital-markets services, primarily in the Washington, D.C. region. Following the decision to sell Comstock Environmental Services (CES), the company reports one continuing segment: Asset Management. Its anchor asset-management agreement is with an affiliate owned by the CEO and covers much of the managed portfolio.
At September 30, 2021, assets under management included 28 operating assets: 13 commercial properties, four multifamily properties and 11 garages. The company also reported 18 development-pipeline assets.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $10.164 | $5.891 | $23.328 | $15.829 |
| Operating income | $3.137 | $0.502 | $4.072 | $1.884 |
| Net income | $2.920 | $0.423 | $14.372 | $1.591 |
| Operating cash flow | Not separately stated | Not separately stated | $3.123 | $1.764 |
- Q3 revenue increased 72.5%; nine-month revenue increased 47.4%. Management attributed growth mainly to $2.6 million of capital-markets fees in Q3, higher reimbursable costs under the 2019 asset-management agreement, and growth in managed properties and parking facilities.
- Operating margin was approximately 30.9% in Q3 2021 versus 8.5% in Q3 2020, and 17.5% for the first nine months of 2021 versus 11.9% in 2020.
- Nine-month net income included an $11.3 million income-tax benefit from a partial release of the deferred-tax-asset valuation allowance. Excluding this unusual tax benefit, reported net income would have been materially lower; the filing does not present an adjusted net-income figure.
- CES, classified as discontinued operations, recorded a $0.724 million loss for the first nine months, including a $0.325 million loss on classification as held for sale. Q3 discontinued-operations loss was $0.137 million.
Financial position and liquidity
- Cash was $9.054 million at September 30, 2021, up from $7.032 million at year-end 2020. Nine-month operating cash flow was $3.123 million; investing cash use was $0.646 million and financing cash use was $0.215 million.
- Current assets were $20.914 million and current liabilities $4.729 million. Current assets included a $3.526 million deposit for the Rockville apartment investment and $4.604 million of related-party receivables.
- Total debt was $5.512 million, including a $5.5 million unsecured affiliate revolver due in 2023; the reported effective rate was 4.25%. Total liabilities were $17.134 million. Operating lease liabilities totaled $7.509 million.
- Equity-method investments carried at fair value declined to $3.168 million from $6.307 million at year-end, primarily reflecting $2.971 million of distributions and a $0.168 million fair-value loss.
Material changes, outlook and risks
- Q3 revenue was highly concentrated in related parties: $10.110 million, or about 99% of total revenue. Nine-month related-party revenue was $23.203 million of $23.328 million. Related-party receivables also increased from $3.568 million at year-end 2020 to $4.604 million.
- The prior-year comparison was affected by the $1.954 million PPP loan, forgiven in April 2021. Management said PPP funding reduced prior-period revenue and expenses.
- The company decided in June 2021 to sell CES, with completion expected within 12 months. CES assets and liabilities were classified as held for sale.
- On October 20, 2021, the company closed on a minority investment in a 263-unit Rockville apartment property. Its escrow deposit had been about $3.5 million at quarter-end; at closing, its initial capital contribution was about $2.1 million. It received a $0.5 million acquisition fee and entered into management agreements.
- Management gave no numerical earnings or revenue guidance. It said the long-term COVID-19 impact on the regional commercial real-estate market remained uncertain, while viewing the anchor portfolio as positioned to withstand potential effects and citing potential for growth as conditions warrant.
- Key risks include real-estate and economic conditions, interest rates, labor and material costs, COVID-19, capital access, and dependence on continuing affiliate relationships. The $11.3 million tax benefit depends on forecasts of future taxable income and could be reversed through a renewed valuation allowance. The company reported approximately $146 million of federal and state NOLs; an ownership change could limit their use.
- The company reported no material legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2021.
Important facts for investors to verify
- How much of earnings growth is recurring asset-management activity versus episodic capital-markets fees and reimbursable affiliate costs.
- The terms, collectability and concentration of affiliate revenue and receivables, including the 2019 asset-management agreement and its termination provisions.
- The assumptions supporting the partial release of the deferred-tax valuation allowance and the likelihood of using NOLs before expiration or ownership-change limits apply.
- The timing and net proceeds of the CES sale, and the status of the Rockville investment and related management-fee arrangements.
- Future cash generation and liquidity after investment commitments, lease payments and the affiliate revolver’s 2023 maturity.