Comstock Holding Companies, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are with FY 2018. The company is a Washington, D.C.-area real estate asset manager and services provider. It exited homebuilding during 2019 and reports homebuilding results as discontinued operations.
Financial performance and position
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $25.317 million | $16.447 million |
| Operating income | $2.275 million | $0.293 million |
| Operating margin | 9.0% | 1.8% |
| Income from continuing operations | $1.464 million | $1.407 million |
| Net income (loss), including discontinued operations | $0.893 million | $(4.385) million |
| Continuing-operations diluted EPS | $0.22 | $0.37 |
| Cash provided by operating activities | $8.394 million | $12.850 million |
| Cash and cash equivalents at year-end | $3.511 million | $0.854 million |
- Asset management revenue was $19.605 million, up from $13.416 million; real estate services revenue was $5.712 million, up from $3.031 million. Growth reflected reimbursable personnel and operating costs, portfolio expansion, environmental-services growth, and financing transactions.
- Operating cash flow included $7.793 million from discontinued operations; therefore, continuing operations contributed much less than the consolidated total. Investing cash flow was $0.145 million provided, and financing cash flow was $5.882 million used.
- Year-end total assets were $19.933 million and total liabilities were $11.576 million. Current assets of $9.315 million were below current liabilities of $10.303 million, a working-capital deficit of approximately $0.988 million.
- Notes payable totaled $6.995 million net on the balance sheet, including $5.706 million due to affiliates. The filing lists $5.810 million of debt maturities in 2020. The company reported no dividend payments and does not anticipate paying dividends in the foreseeable future.
Material changes and significant items
- Revenue rose approximately 54%; operating income increased to $2.275 million. Continuing-operations net income was broadly unchanged, while diluted continuing-operations EPS declined as weighted-average diluted shares rose to 6.799 million from 3.843 million.
- Discontinued homebuilding operations produced a $0.571 million attributable loss in 2019, versus a $5.792 million loss in 2018. The company transferred its Investors X interests and associated debt under a Master Transfer Agreement; residual cash flows were estimated at $7.5 million over three years.
- The company recorded a $0.560 million fair-value loss on real estate venture investments, primarily reflecting lower expected cash flows from an Investors X project. Its year-end fair-value investment balance was $8.421 million.
- At December 30, 2019, the company invested approximately $1.2 million for a 2.5% interest in the Hartford office building and entered into management arrangements. The company also received a $0.5 million acquisition fee. The investment is with an entity controlled by the CEO.
- Revenue concentration is significant: related parties, including CEO-affiliated entities, accounted for $20.562 million, or 81% of total revenue. Related-party receivables were $3.644 million at year-end.
Outlook, risks and controls
- The 2019 Master Asset Management Agreement with a CEO-controlled affiliate covers the Anchor Portfolio and runs initially through December 31, 2027. Its annual fee is the greater of market-rate fees or personnel and public-company costs plus a fixed $1 million; supplemental and incentive fees may also apply. The agreement creates a significant related-party revenue dependency.
- The company provided no quantified FY 2020 guidance. It said the COVID-19 pandemic’s effects on operations, liquidity, property values, receivables and managed-property revenues could not be estimated. Management reported no significant impact to results to date as of the filing, dated April 14, 2020.
- After year-end, the company entered into a $10 million revolving credit facility with CDS, bearing interest at WSJ Prime plus 1%. It drew $5.5 million in March 2020 and retired the $5.7 million CGF affiliate note on April 13, 2020. The facility has a five-year term, although advances generally mature 12 months after disbursement unless otherwise agreed.
- Management identified a material weakness in debt-balance reconciliation and amortization of debt discounts; disclosure controls and internal control over financial reporting were deemed ineffective at December 31, 2019. Remediation efforts include added technical accounting resources and more detailed review procedures.
- The company revised prior-period statements for debt-discount accounting and gross presentation of salary reimbursements. It stated the errors were not material to prior periods and did not affect operating income or total cash flows. The independent auditor issued an unqualified opinion on the financial statements but was not engaged to audit internal controls.
- Other risks include competitive real estate markets, development and regulatory risks, weather impacts on environmental and construction work, dependence on key personnel and affiliates, and valuation uncertainty in Level 3 real estate investments. Management reported no material legal proceedings.
Investor verification priorities
- Review the full audited statements and notes, especially debt terms, affiliate balances, the 2020 refinancing, and cash availability after repayment of the CGF note.
- Assess the sustainability and collectability of revenue and receivables given the 81% related-party revenue concentration and CEO-affiliated contractual relationships.
- Check progress in remediating the material weakness and whether later filings report effective controls.
- Examine the assumptions supporting the $8.421 million fair value of real estate venture investments and the performance of the Hartford investment.
- Monitor COVID-19 effects on managed properties, occupancy, leasing, receivables, asset values, and liquidity; the filing does not quantify these effects.