Comstock Homebuilding Companies, Inc. — 2011 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2011; quarterly figures are also provided for the fourth quarter. The company develops homes and apartments and provides real estate and construction services, operating exclusively in the Washington, D.C. metropolitan area. Its segments are Homebuilding, Apartment Buildings, and Real Estate Services.
Financial performance and condition
Amounts below are in millions of dollars unless stated otherwise.
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $22.2 | $23.9 |
| Homebuilding revenue | $14.1 | $19.1 |
| Other revenue | $8.1 | $4.8 |
| Gross profit | $2.2 | $0.7 |
| Operating loss | $(8.3) | $(8.7) |
| Net income (loss) attributable to Comstock | $1.1 | $(7.7) |
| Operating cash flow | $12.7 | $15.4 |
| Cash and cash equivalents at year-end | $5.6 | $0.5 |
| Total debt at year-end | $29.8 | $28.4 |
- Gross margin was approximately 10.0% of revenue, compared with 2.7% in 2010; operating loss remained substantial. The filing does not report an EBITDA measure.
- 2011 net income included a $9.4 million gain on legal settlement and a $0.2 million gain on troubled debt restructuring. Excluding these gains, the company remained loss-making before tax.
- Year-end total assets were $46.4 million and total liabilities were $33.8 million. Restricted cash was $3.1 million, including a $3.0 million insurance-related deposit unavailable to the company.
- Operating cash flow fell by $2.7 million year over year. The company used $9.8 million in investing activities, primarily for construction of the Cascades apartment project, and generated $2.3 million in financing activities.
- Debt maturities and/or curtailment obligations totaled $29.8 million: $0.6 million in 2012, $5.1 million in 2013, $10.2 million in 2014, $0.3 million in 2015, and $13.7 million in 2016 and thereafter. SunBridge loans carried a 12.5% rate; much of the remaining debt was variable-rate.
Changes versus 2010 and fourth-quarter results
- Revenue declined 6.9%. Homebuilding revenue decreased $5.0 million, partly offset by a $3.4 million increase in other revenue, primarily from real estate services. Real estate services generated $6.6 million, including $4.8 million of related-party revenue.
- Home deliveries fell from 57 to 48; average delivered revenue per unit decreased from $335,000 to $293,000. Gross new-order revenue declined from $18.6 million to $14.5 million, while year-end backlog rose from $0.56 million to $0.63 million on three homes.
- SG&A increased from $5.6 million to $7.4 million, attributed mainly to higher stock compensation, feasibility, and consulting expenses. No impairment charge was recorded in 2011, versus $1.5 million in 2010.
- Fourth-quarter 2011 revenue was $6.3 million, operating loss was $2.8 million, and net loss was $2.7 million. The third quarter included a $6.5 million net income result, principally reflecting the legal settlement.
Outlook, risks, and notable items
- Management expected available resources, rental cash flow, settlements at developing communities, and financing or equity discussions to be sufficient to sustain operations through 2012. This is a management expectation, not a guarantee.
- After year-end, the company sold the 103-unit Commons on Potomac Square apartment project for $19.35 million, receiving approximately $4.7 million in unrestricted net proceeds after debt repayment and retirement of the related non-controlling investment. Portions of the proceeds were subject to warranty and claims escrows.
- Liquidity depends on access to project financing, asset sales, and unit settlements. The company warns that failure to meet minimum settlement requirements on certain facilities could reduce cash available to it. It also reports that cash-flow and credit constraints had led to vendor settlements below amounts owed, potentially affecting future vendor relationships.
- SunBridge refinanced the Eclipse and Penderbrook projects with three-year loans at 12.5%, secured by project assets and subject to minimum sales and release requirements. The financing also involved cross-collateralization, a warrant for 1.0 million Class A shares at $1.03 per share, and a strategic opportunity agreement.
- Major risks include the weak and competitive housing market, restricted buyer mortgage access, geographic concentration, high financing costs, debt maturities, inventory valuation assumptions, construction and regulatory delays, and possible further impairment charges. The company used a 13% discount rate and estimated one-to-two-year sales periods in valuing certain held-for-sale projects.
- The company reported approximately $106 million of federal and state net operating loss carryforwards, but deferred tax assets were fully reserved; ownership changes under Section 382 could limit their use. A shareholder rights plan was adopted to help preserve the tax attributes.
- Related-party matters include $4.8 million of 2011 service revenue from an entity owned by the CEO, headquarters leasing from a CEO-affiliated entity, and debt owed to an entity owned by the CEO. CEO and COO voting control was approximately 78.1% as of March 19, 2012; Class B shares carry 15 votes per share.
- Outstanding commitments included $0.5 million in letters of credit and $2.1 million in performance and payment bonds. Management reported no material legal proceedings after the 2011 settlement of the Balfour dispute. The auditor issued an unqualified opinion; management stated disclosure controls and internal control over financial reporting were effective at year-end.
Key investor verification points
- Reconcile reported 2011 net income to underlying operating performance, especially the $9.4 million legal-settlement gain and other restructuring gains.
- Review unrestricted liquidity, the availability and restrictions on cash, debt covenants and release requirements, and the company’s ability to meet scheduled maturities and sustain operations.
- Confirm the final proceeds, debt repayment, escrow releases, and remaining obligations associated with the March 2012 apartment sale.
- Assess the quality and collectability of related-party service revenue and receivables, and the terms and governance of other related-party arrangements.
- Evaluate the assumptions supporting real estate carrying values and potential impairment exposure, along with the status of project sales, rental operations, and new development plans.