Comstock Homebuilding Companies, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Unaudited consolidated financial statements; dollar amounts below are in millions unless stated otherwise.
Business context
Comstock develops and sells homes and condominiums, develops apartment buildings, and provides real estate services, with operations focused on the Washington, D.C. market. Its three segments are Homebuilding, Apartment Buildings, and Real Estate Services.
Financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $5.394 | $5.589 | $15.883 | $21.156 |
| Gross profit (loss) | $0.259 | ($0.567) | $1.388 | $0.352 |
| Operating loss | ($2.491) | ($3.599) | ($5.498) | ($7.210) |
| Net income (loss) | $6.661 | ($3.428) | $4.210 | ($6.163) |
| Net income (loss) attributable to Comstock | $6.541 | ($3.428) | $3.840 | ($6.163) |
| Diluted earnings (loss) per share | $0.33 | ($0.18) | $0.19 | ($0.34) |
- Gross margin was approximately 4.8% in Q3 and 8.7% for the first nine months of 2011. Despite positive gross profit, the company remained loss-making at the operating level.
- Q3 net income included a $9.434 million net gain on legal settlement and a $0.073 million debt-restructuring gain. The settlement-related gain was the principal reason reported net income turned positive; operating results remained negative.
- Cash and cash equivalents were $6.488 million at September 30, 2011, versus $0.475 million at December 31, 2010; restricted cash was $3.142 million. Total assets were $48.996 million and total liabilities $34.156 million.
- Debt totaled $30.570 million at September 30, 2011, including $5.008 million owed to affiliates. Scheduled 2011 maturities were $3.905 million; the filing says this maturity was refinanced on October 5, 2011.
- For the first nine months, operating cash flow was $11.466 million, investing cash flow was negative $9.334 million, and financing cash flow was positive $3.881 million. Operating cash flow was lower than the prior-year $14.151 million.
Changes versus the prior comparable period
- Revenue fell 3.5% in Q3 and 24.9% year to date. Homebuilding revenue declined to $2.864 million in Q3 and $9.003 million year to date, mainly due to fewer available units and fewer settlements.
- Home deliveries declined to 10 from 17 in Q3 and to 30 from 51 for the nine-month period. Management attributed lower average revenue per home to product mix, not a general decrease in inventory values.
- Apartment-building and real estate-services revenue increased, primarily from general contracting work. These segments generated $2.530 million in Q3 and $6.880 million year to date, but their associated costs also rose.
- SG&A increased to $1.681 million in Q3 and $4.999 million year to date, primarily due to compensation expense from restricted stock grants. No impairment charges were recorded in the 2011 periods; 2010 included $1.548 million.
Outlook, risks, and unusual items
- Management said cash on hand, operating cash flow, and available financing should support current operations through 2012, but ongoing debt or equity financing would be required to support new initiatives. No specific earnings or revenue guidance was provided.
- The July 2011 SunBridge Eclipse loan was $13.8 million, has a 12.5% interest rate, and includes unit-sales requirements and release payments from unit sales. The company also issued an affiliate a warrant to purchase 1.0 million shares at $1.03 and entered a strategic agreement to jointly pursue certain projects.
- After quarter-end, SunBridge funded approximately $5.4 million for Penderbrook refinancing, with 12.5% interest and sales-related payment requirements. The Penderbrook and Eclipse projects cross-collateralize the SunBridge loans.
- After quarter-end, the company agreed to sell the Cascades Apartments for $19.75 million, subject to buyer due diligence and closing conditions. Management estimated approximately $6.0 million of net proceeds after debt repayment and retirement of non-controlling equity financing. Escrows include $0.250 million for warranty work and $0.750 million for indemnification and other obligations.
- The Balfour Beatty matter settled in July 2011 for $10.293 million; the statements report a $9.434 million net gain after closing costs. The company also had $0.528 million of letters of credit and $2.133 million of performance and payment bonds outstanding; none had been drawn. A call or default could be material.
- Real estate valuations depend on estimates of prices, sales pace, and discount rates. Management warned that deteriorating market conditions could lead to further impairment charges. Other cited risks include substantial debt, interest-rate exposure, access to capital, and real estate market conditions.
- The company reported approximately $106 million of federal and state net operating losses, potentially worth up to $41 million in tax savings, but their use could be limited by an ownership change under Section 382. The filing also notes a 20% annual preferred return for Cascades private-placement investors, subject to project performance.
Important facts for investors to verify
- How much of reported earnings and cash generation is repeatable after excluding the legal-settlement gain and asset-sale-related cash flows.
- Whether the Cascades sale closed on the stated terms, and whether the estimated net proceeds were received after debt repayment and escrows.
- Compliance with SunBridge sales covenants and required unit-sale payments, and the effect of the 12.5% financing cost and cross-collateralization.
- Near-term debt maturities, refinancing terms, liquidity needs, and management’s expectation of adequate financing through 2012.
- Home sales pace, remaining inventory at Eclipse and Penderbrook, and sensitivity of real estate valuations to weaker prices or slower sales.
- Potential exposure from letters of credit, performance bonds, litigation, related-party arrangements, and any ownership change that could restrict NOL use.