Comstock Holding Companies, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company provides real estate asset, property and development management and related services, primarily in the Washington, D.C. region. Unless noted, amounts below are in millions of dollars; the filing presents financial statements in thousands.
Financial results and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Continuing-operations revenue | $6.324 | $4.505 | $13.164 | $9.939 |
| Operating income | $0.492 | $0.901 | $0.935 | $1.382 |
| Income from continuing operations | $11.648 | $0.798 | $12.039 | $1.079 |
| Net income, including discontinued operations | $11.205 | $1.180 | $11.452 | $1.168 |
| Operating margin | 7.8% | 20.0% | 7.1% | 13.9% |
- Q2 revenue increased 40.4% year over year; six-month revenue increased 32.4%. Growth was attributed mainly to reimbursable costs under the 2019 Asset Management Agreement (AMA), growth in managed assets, and construction management fees.
- Direct costs rose 71.3% in Q2 and 47.5% for the six-month period, mainly from personnel costs supporting business growth. General and administrative expenses declined, partly due to lower stock compensation.
- Net income includes an $11.3 million deferred tax benefit from partially releasing the valuation allowance on deferred tax assets. Excluding this unusual benefit, reported earnings would be substantially lower; the filing does not present an adjusted earnings measure.
- CES, classified as discontinued operations, reported a Q2 loss of $0.443 million and a six-month loss of $0.587 million, including a $0.325 million loss on classification as held for sale.
- Cash and cash equivalents were $10.205 million at June 30, versus $7.032 million at December 31, 2020. Continuing-operations operating cash flow was $0.822 million and investing cash flow was $2.483 million, primarily reflecting investment distributions; financing cash flow was negative $0.168 million. Cash from discontinued operations was positive $0.036 million.
- Total notes payable were $5.548 million, including $5.5 million due to an affiliate and maturing in 2023. Operating lease liabilities totaled $7.651 million. Current assets were $17.634 million and current liabilities $5.023 million.
- Stockholders’ equity was $22.784 million, including Series C preferred stock with a $17.203 million liquidation preference. The company reported approximately $146 million of federal and state net operating loss carryforwards.
Material changes and developments
- On June 16, 2021, the company decided to pursue a sale of CES to focus on its asset management operations. Completion was expected within 12 months. CES assets of $4.1 million and liabilities of $2.147 million were classified as held for sale at quarter-end.
- The SBA forgave the company’s $1.95 million PPP loan in April 2021. Prior-year comparisons are affected by PPP support: the filing says 2020 revenue was reduced by $1.4 million and payroll and rent expense by $1.9 million.
- Equity-method investments carried at fair value declined to $3.652 million from $6.307 million at year-end, reflecting $2.543 million in distributions and $0.112 million in fair-value losses.
- Continuing-operations revenue was highly concentrated in related parties: $6.268 million of Q2 revenue and $13.093 million for the six-month period came from related-party customers.
Outlook, risks and contingencies
- No quantitative earnings or revenue guidance is provided. Management said the long-term impact of COVID-19 on the regional commercial real estate market remains uncertain, but believes the Anchor Portfolio is positioned to withstand potential negative effects and that the company can pursue growth as conditions warrant.
- The principal Anchor Portfolio agreement is with an affiliate owned by the CEO. It runs through December 31, 2027, subject to renewal and termination provisions. The company also leases its headquarters from a CEO- and family-controlled affiliate.
- Management’s tax benefit depends on forecasts of future taxable income; if income is below expectations, the company may need to reestablish a valuation allowance. A potential ownership change under Section 382 could also impair NOLs.
- Risk factors include real estate and economic conditions, interest rates, client retention and competition, labor and material costs, COVID-19, access to capital, and continued affiliate relationships. The filing reports no material legal proceedings or off-balance-sheet arrangements.
- Management concluded disclosure controls were effective as of June 30, 2021 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much recurring revenue and cash flow the company can generate without the one-time $11.3 million deferred tax benefit and with CES excluded.
- Whether the CES sale closes within the expected 12-month period and the ultimate proceeds compared with the held-for-sale valuation.
- The durability and terms of related-party revenue, receivables, the 2019 AMA, and the CEO-affiliated headquarters lease.
- Whether management’s taxable-income forecasts support the valuation-allowance release and continued use of approximately $146 million in NOLs.
- Cash conversion and liquidity as reimbursable costs and personnel expenses grow, including obligations under debt and long-term leases.
- Progress on the 99%-pre-leased development scheduled for delivery in 2022 and the company’s development pipeline, which remain subject to market and execution risks.