The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data, number of units, or as otherwise noted)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited financial statements of Comstock Holding Companies, Inc. and subsidiaries (Comstock or the
Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in accordance with the instructions to Form
10-Q
and Article 8 of Regulation
S-X.
Such financial statements do not include all of the disclosures required by GAAP for complete financial statements. In our opinion, all
adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included in the accompanying financial statements. For further information and a discussion of our significant accounting policies,
other than discussed below, refer to our audited consolidated financial statements in our Annual Report on Form
10-K
for the fiscal year ended December 31, 2016.
Comstock Holding Companies, Inc., incorporated in 2004 as a Delaware corporation, is a multi-faceted real estate development and construction
services company focused in the Washington, D.C. metropolitan area (Washington, D.C., Northern Virginia and Maryland suburbs of Washington, D.C.). We have substantial experience with building a diverse range of products, including multi-family
homes, single-family homes, townhouses,
mid-rise
condominiums, high-rise multi-family condominiums and
mixed-use
(residential and commercial) developments. References in
this Form
10-Q
to Comstock, Company, we, our and us refer to Comstock Holding Companies, Inc. together in each case with our subsidiaries and any
predecessor entities unless the context suggests otherwise.
The Companys Class A common stock is traded on the NASDAQ Capital
Market under the symbol CHCI and has no public trading history prior to December 17, 2004.
Throughout this quarterly
report on Form
10-Q,
amounts in thousands, except per share data, number of units, or as otherwise noted.
For the three months ended March 31, 2017 and 2016, comprehensive income (loss) equaled net income (loss); therefore, a separate
statement of comprehensive income (loss) is not included in the accompanying consolidated financial statements.
Liquidity and Capital Resources
We require capital to operate, to post deposits on new potential acquisitions, to purchase and develop land, to construct homes, to
fund related carrying costs and overhead and to fund various advertising and marketing programs to generate sales. These expenditures include payroll, community engineering, entitlement, architecture, advertising, utilities and interest as well as
the construction costs of our homes. Our sources of capital include, and we believe will continue to include, private equity and debt placements (which has included significant participation from Company insiders), funds derived from various secured
and unsecured borrowings to finance acquisition, development and construction on acquired land, cash flow from operations, which includes the sale and delivery of constructed homes, finished and raw building lots and the potential sale of public
debt and equity securities. The Company is involved in ongoing discussions with lenders and equity sources in an effort to provide additional growth capital to fund various new business opportunities. See Note 13 in the accompanying consolidated
financial statements for more details on our credit facilities and Note 11 in the accompanying consolidated financial statements for details on private placement offerings.
We have outstanding borrowings with various financial institutions and other lenders that have been used to finance the acquisition,
development and construction of real estate projects. The Company has generally financed its development and construction activities on a single or multiple project basis so it is not uncommon for each of our projects or collection of our projects
to have a separate credit facility. Accordingly, the Company typically has had numerous credit facilities and lenders.
As of
March 31, 2017, $35.3 million of the Companys outstanding credit facilities and project related loans mature at various periods through the end of 2017. We are in active discussions with our lenders seeking long term extensions and
modifications to these loans. These debt instruments impose certain restrictions on our operations, including speculative unit construction limitations, curtailment obligations, and financial covenant compliance. If we fail to comply with any
of these restrictions, an event of default could occur. Additionally, events of default could occur if we fail to make required debt service payments or if we fail to come to agreement on an extension on a certain facility prior to a given
loans maturity date. Any event of default would likely render the obligations under these instruments due and payable as of that event. Any such event of default would allow certain of our lenders to exercise cross default provisions in
our loan agreements with them, such that all debt with that institution could be called into default. We are anticipating that with the successful resolution of the debt extension discussions with our lenders, capital raises from our recent private
placement, current available cash on hand, and additional cash from settlement proceeds at existing and under development communities, the Company will have sufficient financial resources to sustain its operations through the next 12 months, though
no assurances can be made that the Company will be successful in its efforts. The Company will also continue to focus on its cost structure in an effort to conserve cash and manage expenses. Such actions may include cost reductions and/or deferral
arrangements with respect to current operating expenses.
4
Recent Developments
On March 22, 2017, the Company entered into a Share Exchange Agreement with the holders of the Companys Series B Preferred Stock
pursuant to which the Company exchanged 772,210 shares of the Companys Series B Preferred Stock for 772,210 shares of the Companys newly created Series
C Non-Convertible Preferred
Stock,
par value $0.01 per share and a stated value of $5.00 per share (the Series C Preferred Stock). The Series C Preferred Stock has a discretionary dividend feature, as opposed to the mandatory dividend feature in the Series B Preferred
Stock. The Series B Preferred Stock, together with all accrued dividend earned through the conversion date, was retired
upon re-acquisition.
On March 24, 2017, the Company entered into a share repurchase agreement with Investor Management, L.C., an entity owned by Gregory V.
Benson, the former Chief Operating Officer of the Company, whereby the Company agreed to repurchase 193,052 shares of the Series C Preferred Stock held by Investor Management, L.C. for $89. The Series C Preferred Stock acquisition closed on
April 4, 2017, and the Series C Preferred Stock was retired.
On March 24, 2017, Comstock Acquisitions II, L.C.
(Purchaser), an entity wholly owned by certain officers, directors, and employees of the Company, entered into a share repurchase agreement with Mr. Benson and Clareth, LLC, an entity wholly owned by Mr. Benson
(Clareth), pursuant to which it agreed to purchase 64,563 shares of the Companys Class A common stock and 170,250 shares of the Companys Class B common stock held by Clareth for $235. The purchase transaction closed
on April 4, 2017. Upon repurchase of the Companys Class B common stock, pursuant to the Amended and Restated Certificate of Incorporation of the Company, the Class B common stock automatically converted to Class A common
stock.
On March 24, 2017, Christopher Clemente, the Chief Executive Officer of the Company entered into a share repurchase agreement
with Clareth pursuant to which he agreed to purchase 25,000 shares of the Companys Class B common stock held by Clareth for $25. The purchase transaction closed on April 4, 2017. See Note 9 to the consolidated financial statements
for further information.
Reclassifications
Certain amounts in the prior year consolidated financial statements have been reclassified to the current year presentation. The impact of the
reclassifications made to prior year amounts is not material and did not affect net loss.
Use of Estimates
Our financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts for the reporting periods. We base these estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. We evaluate
these estimates and judgements on an ongoing basis. Actual results may differ from those estimates under different assumptions or conditions.
Recently
Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update
(ASU) 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09). ASU 2014-09 provides
a single comprehensive model for entities to use in accounting for revenue arising from contracts
with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.
ASU No. 2014-09 will
require an entity to recognize revenue when it transfers
promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued
ASU 2015-14, which
deferred the effective date of
ASU 2014-09 for
one year, which would make the guidance effective for the Companys first
fiscal year beginning after December 15, 2017. Additionally, the FASB has also decided to permit entities to early adopt the standard, which allows for either full retrospective or modified retrospective methods of adoption, for reporting
periods beginning after December 15, 2016. The Company is continuing to evaluate the impact of
ASU 2014-09.
5
In February 2016, the FASB issued
ASU No. 2016-02, Leases
(ASU 2016-02). The
core principle of the standard is that a lessee should recognize the assets and
liabilities that arise from leases. A lessee should recognize in its statement of financial position a liability to make lease payments (the lease liability) and
a right-of-use asset
representing its right to use the underlying asset for the lease term.
ASU 2016-02 is
effective for public companies for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact this new standard will have on our
financial statements.
We assessed other accounting pronouncements issued or effective during the three months ended March 31, 2017
and deemed they were not applicable to us and are not anticipated to have a material effect on our consolidated financial statements.
2. REAL ESTATE
INVENTORIES
After impairments and write-offs, real estate held for development and sale consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
2017
|
|
|
2016
|
|
Land and land development costs
|
|
$
|
32,665
|
|
|
$
|
33,355
|
|
Cost of construction (including capitalized interest and real estate taxes)
|
|
|
16,773
|
|
|
|
16,487
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,438
|
|
|
$
|
49,842
|
|
|
|
|
|
|
|
|
|
|
3. WARRANTY RESERVE
Warranty reserves for units settled are established to cover potential costs for materials and labor with regard to warranty-type claims
expected to arise during the typical
one-year
warranty period provided by the Company or within the
two-year
statutorily mandated structural warranty period for
condominiums. Because the Company typically subcontracts its homebuilding work, subcontractors are required to provide the Company with an indemnity and a certificate of insurance prior to receiving payments for their work. Claims relating to
workmanship and materials are generally the primary responsibility of the subcontractors and product manufacturers. The warranty reserve is established at the time of closing, and is calculated based upon historical warranty cost experience and
current business factors. This reserve is an estimate and actual warranty costs could vary from these estimates. Variables used in the calculation of the reserve, as well as the adequacy of the reserve based on the number of homes still under
warranty, are reviewed on a periodic basis. Warranty claims are directly charged to this reserve as they arise.
The following table is a
summary of warranty reserve activity which is included in Accounts payable and accrued liabilities within the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
288
|
|
|
$
|
312
|
|
Additions
|
|
|
50
|
|
|
|
44
|
|
Releases and/or charges incurred
|
|
|
(60
|
)
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
278
|
|
|
$
|
314
|
|
|
|
|
|
|
|
|
|
|
4. CAPITALIZED INTEREST AND REAL ESTATE TAXES
Interest and real estate taxes incurred relating to the development of lots and parcels are capitalized to real estate inventories during the
active development period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties are substantially complete or the property becomes inactive. A project becomes inactive when development and
construction activities have been suspended indefinitely. Interest is capitalized based on the interest rate applicable to specific borrowings or the weighted average of the rates applicable to other borrowings during the period. Interest and real
estate taxes capitalized to real estate inventories are expensed as a component of cost of sales as related units are sold.
6
The following table is a summary of interest and real estate taxes incurred and capitalized and
interest and real estate taxes expensed for units settled:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Total interest incurred and capitalized
|
|
$
|
1,026
|
|
|
$
|
736
|
|
Total real estate taxes incurred and capitalized
|
|
|
40
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Total interest and real estate taxes incurred and capitalized
|
|
$
|
1,066
|
|
|
$
|
758
|
|
|
|
|
|
|
|
|
|
|
Interest expensed as a component of cost of sales
|
|
$
|
451
|
|
|
$
|
292
|
|
Real estate taxes expensed as a component of cost of sales
|
|
|
60
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
Interest and real estate taxes expensed as a component of cost of sales
|
|
$
|
511
|
|
|
$
|
341
|
|
|
|
|
|
|
|
|
|
|
The amount of interest from entity level borrowings that we are able to capitalize in accordance with
Accounting Standards Codification (ASC) 835 is dependent upon the average accumulated expenditures that exceed project specific borrowings. For the three months ended March 31, 2017 and 2016, the Company expensed $0 and $208,
respectively, of interest from entity level borrowings.
Additionally, when a project becomes inactive, its interest, real estate taxes
and indirect production overhead costs are no longer capitalized but rather expensed in the period they are incurred. For the three months ended March 31, 2017 and 2016, the Company expensed $0 and $8 of interest and real estate taxes for
inactive projects.
5. EARNINGS PER SHARE
The weighted average shares and share equivalents used to calculate basic and diluted earnings per share for the three months ended
March 31, 2017 and 2016 are presented in the accompanying consolidated statements of operations. Restricted stock awards, stock options and warrants for the three months ended March 31, 2017 and 2016 are included in the diluted earnings
per share calculation using the treasury stock method and average market prices during the periods, unless their inclusion would be anti-dilutive.
As a result of the net income attributable to common stockholders for the three months ended March 31, 2017, we have included the
following shares to the diluted share computation. As a result of the net losses attributable to common stockholders for the three months ended March 31, 2016, the following shares have been excluded from the diluted share computation as their
inclusion would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Restricted stock awards
|
|
|
5
|
|
|
|
1
|
|
Warrants
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
6. SEGMENT DISCLOSURES
We operate our business through three segments: Homebuilding, Multi-family, and Real Estate Services. We are currently focused on the
Washington, D.C. area market.
In our Homebuilding segment, we develop properties with the intent to sell as
fee-simple
properties or condominiums to individual buyers or to private or institutional investors. Our
for-sale
products are designed to attract first-time, early
move-up,
and secondary
move-up
buyers. We focus on products that we are able to offer for sale in the middle price points within the markets where we operate, avoiding the
very
low-end
and
high-end
products.
In our Multi-family
segment, we focus on projects ranging from approximately 75 to 200 units in locations that are supply constrained with demonstrated demand for stabilized assets. We seek opportunities in the multi-family rental market where our experience and core
capabilities can be leveraged. We will either position the assets for sale when completed or operate the asset within our own portfolio. Operating the asset for our own account affords us the flexibility of converting the units to condominiums in
the future.
7
In our Real Estate Services segment, we pursue projects in all aspects of real estate management,
including strategic planning, land development, entitlement, property management, sales and marketing, workout and turnaround strategies, financing and general construction. We are able to provide a wide range of construction management and general
contracting services to other property owners.
The following table includes the Companys three reportable segments of Homebuilding,
Multi-family, and Real Estate Services. Each of these segments operates within the Companys single Washington, D.C. area reportable geographic segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
|
|
|
|
|
|
|
|
|
|
|
|
|
Estate
|
|
|
|
|
|
|
Homebuilding
|
|
|
Multi-family
|
|
|
Services
|
|
|
Total
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
10,064
|
|
|
$
|
|
|
|
$
|
204
|
|
|
$
|
10,268
|
|
Gross profit (loss)
|
|
|
963
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
943
|
|
Net (loss) income
|
|
|
(644
|
)
|
|
|
|
|
|
|
(20
|
)
|
|
|
(664
|
)
|
Depreciation and amortization
|
|
|
65
|
|
|
|
|
|
|
|
9
|
|
|
|
74
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
56,317
|
|
|
|
|
|
|
|
79
|
|
|
|
56,396
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
9,523
|
|
|
$
|
|
|
|
$
|
183
|
|
|
$
|
9,706
|
|
Gross profit (loss)
|
|
|
878
|
|
|
|
|
|
|
|
92
|
|
|
|
970
|
|
Net (loss) income
|
|
|
(1,380
|
)
|
|
|
|
|
|
|
92
|
|
|
|
(1,288
|
)
|
Depreciation and amortization
|
|
|
83
|
|
|
|
|
|
|
|
3
|
|
|
|
86
|
|
Interest expense
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
213
|
|
Total assets
|
|
|
48,161
|
|
|
|
|
|
|
|
263
|
|
|
|
48,424
|
|
The Company allocates sales, marketing and general and administrative expenses to the individual segments
based upon specifically allocable costs.
7. INCOME TAX
For the three months ended March 31, 2017 the Company recognized income tax expense of $0. For the three months ended March 31, 2016,
the Company recognized income tax expense of $25, and the effective tax rate was 2%.
The Company has not recorded any accruals related to
uncertain tax positions as of March 31, 2017 and 2016. We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. The 2013 through 2016 tax years remain subject to examination by federal and most state tax
authorities.
At March 31, 2017 and December 31, 2016, due to the uncertainties surrounding the realization of the deferred tax assets,
the Company recorded a full valuation allowance.
8. COMMITMENTS AND CONTINGENCIES
Litigation
Currently, we are not
subject to any material legal proceedings. From time to time, however, we are named as a defendant in legal actions arising from our normal business activities. Although we cannot accurately predict the amount of our liability, if any, that could
arise with respect to legal actions pending against us; we do not expect that any such liability will have a material adverse effect on our financial position, operating results and cash flows. We believe that we have obtained adequate insurance
coverage, rights to indemnification, or where appropriate, have established appropriate reserves in connection with any such legal proceedings.
8
Letters of credit, performance bonds and compensating balances
The Company has commitments as a result of contracts with certain third parties, primarily local governmental authorities, to meet certain
performance criteria outlined in such contracts. The Company is required to issue letters of credit and performance bonds to these third parties as a way of ensuring that the commitments entered into are met. These letters of credit and performance
bonds issued in favor of the Company and/or its subsidiaries mature on a revolving basis, and if called into default, would be deemed material if assessed against the Company and/or its subsidiaries for the full amounts claimed. In some
circumstances, we have negotiated with our lenders in connection with foreclosure agreements for the lender to assume certain liabilities with respect to the letters of credit and performance bonds. We cannot accurately predict the amount of any
liability that could be imposed upon the Company with respect to maturing or defaulted letters of credit or performance bonds. At March 31, 2017 and 2016, the Company had $1.1 million and $1.9 million in outstanding letters of credit,
respectively. At March 31, 2017 and 2016, the Company had $4.2 million and $4.8 million in outstanding performance and payment bonds, respectively. No amounts have been drawn against the outstanding letters of credit or performance
bonds.
We are required to maintain compensating balances in escrow accounts as collateral for certain letters of credit, which are funded
upon settlement and release of units. The cash contained within these escrow accounts is subject to withdrawal and usage restrictions. As of March 31, 2017 and December 31, 2016, we had approximately $1.0 million and
$0.8 million, respectively, in these escrow accounts, which are included in Restricted cash in the accompanying consolidated balance sheets.
9. RELATED PARTY TRANSACTIONS
The
Company leases its corporate headquarters from an affiliated entity that is wholly-owned by our Chief Executive Officer. Future minimum lease payments under this lease are as follows:
|
|
|
|
|
2017
|
|
$
|
157
|
|
2018
|
|
|
160
|
|
|
|
|
|
|
Total
|
|
$
|
317
|
|
|
|
|
|
|
For the three months ended March 31, 2017 and 2016, total payments made under this lease agreement were
$52 and $81, respectively.
On February 23, 2009, Comstock Homes of Washington, L.C., a wholly-owned subsidiary of the Company,
entered into a Services Agreement with Comstock Asset Management, L.C., an entity wholly-owned by our Chief Executive Officer, to provide services related to real estate development and improvements, including legal, accounting, marketing,
information technology and other additional support services. For the three months ended March 31, 2017 and 2016, the Company billed Comstock Asset Management, L.C. $203 and $183, respectively, for services and
out-of-pocket
expenses. Revenues from this arrangement are included within Revenue other in the accompanying consolidated statements of operations. As of March 31, 2017 and
December 31, 2016, the Company was owed $68 and $132, respectively, under this contract, which is included in Trade receivables in the accompanying consolidated balance sheets.
On October 17, 2014, Comstock Growth Fund (CGF), an administrative entity managed by the Company, entered into a subscription
agreement with Comstock Development Services, LC (CDS), an entity wholly-owned by our Chief Executive Officer, pursuant to which CDS purchased membership interests in CGF for a principal amount of $10 million. Other purchasers who
purchased interests in the private placement included members of the Companys management and board of directors and other third-party, accredited investors for an additional principal amount of $6.2 million (the CGF Private
Placement).
Simultaneously, on October 17, 2014, the Company entered into an unsecured promissory note with CGF whereby CGF
made a loan to the Company in the initial principal amount of $10 million and a maximum capacity of up to $20 million. On December 18, 2014, the loan agreement was amended and restated to provide for a maximum capacity of
$25 million. All of the other terms of the unsecured promissory note remained the same. The Company borrowed an additional principal loan amount of $6.2 million under the amended and restated CGF promissory note bringing the total
aggregate principal amount borrowed to $16.2 million. The CGF loan has a three year term carrying a floating interest rate of LIBOR plus 9.75% with a 10% floor. The loan requires an annual principal repayment in the amount of 10% of the average
outstanding balance and a monthly interest payment that will be made in arrears. Purchasers other than CDS who purchased membership interests in CGF received warrants that represent the right to purchase an amount of shares of our Class A
common stock, depending upon the investment amount. As of March 31, 2017 and December 31, 2016, there were 76 warrants issued in connection with the CGF Private Placement outstanding, representing the right to purchase shares of our
Class A common stock having an aggregate fair value of $433, which was considered as a debt discount. The Company amortizes the debt discount over the three year term of the loan to interest expense. As of March 31, 2017,
$12.6 million was outstanding in principal and accrued interest, net of discounts, on the CGF loan. For the three months ended March 31, 2017 and 2016, the Company made interest payments of $0.4 million, on the CGF loan. In May 2017,
subsequent to quarter end, the Company made the second principal curtailment to CGF in the amount of $1.5 million.
9
On December 18, 2014, CGF entered into amended and restated subscription agreements with
CDS, members of the Companys management and board of directors and the other third party accredited investors who participated in the CGF Private Placement (the Amended CGF Private Placement). Under the Amended CGF Private
Placement, in addition to the warrants described above, the Company entered into a commitment to grant 226,857 shares of our Class A common stock to the purchasers in the Amended CGF Private Placement. On May 12, 2015, the Company issued
226,857
un-registered
shares of its Class A common stock to the purchasers in the Amended CGF Private Placement. The Amended CGF Private Placement was closed for additional investments on May 15,
2015.
On December 29, 2015, the Company and Stonehenge Funding, L.C. (Stonehenge), an entity wholly owned by our Chief
Executive Officer, entered into a Note Exchange and Subscription Agreement pursuant to which the note in the original principal amount of $4,500 issued to the Company by Stonehenge was exchanged for 772,210 shares of the Companys Series B
Non-Convertible
Preferred Stock, par value $0.01 per share and a stated value of $5.00 per share (the Series B Preferred Stock). The number of shares of Series B Preferred Stock received by Stonehenge in
exchange for the note represented the principal amount outstanding plus accrued interest under the note as of December 29, 2015, which was $3,861. The note was cancelled in its entirety on December 29, 2015. The holders of Series B
Preferred Stock earn dividends at a rate of 8.75% per annum accruing from the effective date of the Note Exchange and Subscription Agreement. For the three months ended March 31, 2017 and 2016, 15,663 and 17,216 shares of the Series B Preferred
Stock, respectively, with a liquidation value of $78 and $86, respectively, were paid
in-kind,
and are included in Stockholders equity in the accompanying consolidated balance sheets.
On March 22, 2017, the Company entered into a Share Exchange Agreement with the holders of the Companys Series B Preferred Stock
pursuant to which the Company exchanged 772,210 shares of the Companys Series B Preferred Stock for 772,210 shares of the Companys newly created Series C
Non-Convertible
Preferred Stock, par value
$0.01 per share and a stated value of $5.00 per share. The Series C Preferred Stock has a discretionary dividend feature, as opposed to the mandatory dividend feature in the Series B Preferred Stock. The Series B Preferred Stock, together with all
accrued dividends earned through the conversion date, was retired upon
re-acquisition
and the fair value of the Series C Preferred Stock is recorded in Stockholders equity in the accompanying
consolidated balance sheets.
On March 24, 2017, the Company entered into a share repurchase agreement with Investor Management,
L.C., an entity owned by Gregory V. Benson, the former Chief Operating Officer of the Company, whereby the Company agreed to repurchase 193,052 shares of the Series C Preferred Stock held by Investor Management, L.C. for $89. The Series C Preferred
Stock acquisition closed on April 4, 2017, and the Series C Preferred Stock was retired.
On December 29, 2015, Comstock Growth
Fund II, L.C. (CGF II), an administrative entity managed by the Company was created for the purpose of extending loans to the Company. CGF II entered into a subscription agreement with CDS pursuant to which CDS purchased membership
interests in CGF II for an initial aggregate principal amount of $5.0 million (the CGF II Private Placement).
Simultaneously, on December 29, 2015, the Company and CGF II entered into an unsecured revolving line of credit promissory note in the
initial principal amount of $5.0 million and a maximum amount available for borrowing of up to $10.0 million with a two year term, which may be extended an additional year. The interest rate is 10% per annum, and interest payments will be
accrued and paid
in-kind
monthly for the first year, and then paid current monthly in arrears beginning December 31, 2016. As of March 31, 2017 and December 31, 2016, $3.3 million was
outstanding in principal and accrued interest on the CGF II loan.
See Note 11 to the consolidated financial statements for a description
of the Comstock VIII and Comstock X Private Placements and Note 13 to the consolidated financial statements for a description of the CGF Private Placement and the CGF II Private Placement.
10. NOTE RECEIVABLE
The Company
originated a note receivable to a third party in the amount of $180 in September 2014. This note has a maturity date of September 2, 2019 and is payable in monthly installments of principal and interest of $3. This note bears a fixed interest
rate of 6% per annum. As of March 31, 2017 and December 31, 2016, the outstanding balance of the note was $94 and $103, respectively, and is included within Other assets in the accompanying consolidated balance sheets. The
interest income of $1 and $2 for the three months ended March 31, 2017 and 2016, respectively, is included in Other income, net in the consolidated statements of operations.
10
11. VARIABLE INTEREST ENTITY
Included within the Companys real estate inventories at March 31, 2017 and December 31, 2016 are several projects that are
determined to be variable interest entities (VIEs). These entities have been established to own and operate real estate property and were deemed VIEs primarily based on the fact that the equity investment at risk is not sufficient to
permit the entities to finance their activities without additional financial support. The Company determined that it was the primary beneficiary of these VIEs as a result of its majority voting and complete operational control of the entities.
On August 23, 2012, the Company formed New Hampshire Ave. Ventures, LLC, a joint venture of its subsidiary, Comstock Ventures XVI, L.C.,
and 6000 New Hampshire Avenue, LLC, for the purpose of acquiring, developing and constructing a
111-unit
project (the NHA Project) in Washington, D.C. The Company evaluated the joint venture and
determined that the equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support. The Company determined that it was the primary beneficiary of the VIE as a result of its complete
operational control of the activities that most significantly impact the economic performance and obligation to absorb losses, or receive benefits. The Company contributed its ownership interest in Comstock Ventures XVI, L.C. to Comstock Investors
VII, L.C. (Comstock VII) on March 13, 2013. During the three months ended March 31, 2016, New Hampshire Ave. Ventures, LLC distributed $1.4 million to its
non-controlling
interest
member, 6000 New Hampshire Avenue, LLC. No such distributions were made during the three months ended March 31, 2017.
In
December 2013, Comstock Investors VIII, L.C. (Comstock VIII) entered into subscription agreements with certain accredited investors (Comstock VIII Class B Members), pursuant to which Comstock VIII Class B
Members purchased membership interests in Comstock VIII for an aggregate amount of $4.0 million (the Comstock VIII Private Placement). In connection with the Comstock VIII Private Placement, the Company issued 15 warrants for the
purchase of shares of the Companys Class A common stock to
the non-affiliated
accredited investors, having an aggregate fair value of $131. Comstock VIII Class B Members included unrelated
third-party accredited investors along with members of the Companys board of directors and the Companys former Chief Operating Officer and the former Chief Financial Officer. The Comstock VIII Class B Members are entitled to a
cumulative, preferred return of 20% per annum, compounded annually on their capital account balances. The Company has the right to repurchase the interests of the Comstock VIII Class B Members at any time, provided that (i) all of the
Comstock VIII Class B Members interests are acquired, (ii) the purchase is made in cash and (iii) the purchase price equals the Comstock VIII Class B Members capital accounts plus an amount necessary to cause the
preferred return to equal a cumulative cash on cash return equal to 20% per annum. The proceeds from the Comstock VIII Private Placement have been used for the construction of the following projects: The Townes at HallCrest in Sterling,
Virginia consisting of 42 townhome units, and Townes at Maxwell Square Condominium in Frederick, Maryland consisting of 45 townhome condominium units (collectively, the Investor VIII Projects). Proceeds of the Comstock VIII Private
Placement were utilized to provide capital needed to complete the Investor VIII Projects in conjunction with project financing for the Investor VIII Projects, to reimburse the Company for prior expenditures incurred on behalf of the
Investor VIII Projects, and for general corporate purposes of the Company. The Company evaluated Comstock VIII and determined that the equity investment at risk is not sufficient to permit the entity to finance its activities without additional
financial support and the Company was the primary beneficiary as a result of its complete operational control of the activities that most significantly impact the economic performance and its obligation to absorb losses, or receive benefits
accordingly, the Company consolidates this entity. In January 2017, the Company fully redeemed the remaining equity interest of Class B Members in Comstock VIII after paying $1.9 million in distributions. No distributions were paid to the
Comstock VIII Class B Members during the three months ended March 31, 2016.
In June 2015, Comstock Investors IX, L.C.
(Comstock IX) entered into subscription agreements with third-party accredited investors (Comstock IX Class B Members), pursuant to which Comstock IX Class B Members purchased membership interests in Comstock IX for
an aggregate amount of $2.5 million (the Comstock IX Private Placement). The Comstock IX Class B Members are entitled to a cumulative, preferred return of 20% per annum, compounded annually on their capital account
balances. The Company has the right to repurchase the interests of the Comstock IX Class B Members at any time, provided that (i) all of the Comstock IX Class B Members interests are acquired, (ii) the purchase is made in
cash and (iii) the purchase price equals the Comstock IX Class B Members capital accounts plus any amount necessary to cause the preferred return to equal a cumulative cash on cash return equal to 20% per annum. The proceeds
from the Comstock IX Private Placement have been utilized (A) for the current construction of the Marrwood East project of 35 single family homes in Loudoun County Virginia, (B) to reimburse the Company for prior expenditures incurred on
behalf of the Marrwood East project and (C) for general corporate purposes of the Company. The Company evaluated Comstock IX and determined that the equity investment at risk is not sufficient to permit the entity to finance its activities
without additional financial support and the Company was the primary beneficiary as a result of its complete operational control of the activities that most significantly impact the economic performance and its obligation to absorb losses or receive
benefits. Accordingly, the Company consolidates this entity. No distributions have been paid to the Comstock IX Class B Members to date.
11
In August 2016, Comstock Investors X, L.C. (Comstock X) entered into a subscription
agreement with an accredited investor (Comstock X Class B Member), pursuant to which the Comstock X Class B Member purchased membership interests in Comstock X for an initial amount of $5.0 million, which is part of an
aggregate capital raise of $14.5 million (the Comstock X Private Placement). The Comstock X Class B Member is Comstock Development Services, LC (CDS), an entity wholly owned by Christopher Clemente, our Chief
Executive Officer. In October 2016, the Comstock X Class B Member purchased additional interests in the Comstock X Private Placement in an amount of $9.5 million resulting in an aggregate subscription amount of $14.5 million. In
connection with the Comstock X Private Placement, the Company issued a total of 150 warrants for the purchase of shares of the Companys Class A common stock, having an aggregate fair value of $258. The Comstock X Member is entitled to a
cumulative, preferred return of 6% per annum, compounded annually on the capital account balance. The Company has the right to repurchase the interest of the Comstock X Class B Member at any time, provided that (i) all of the Comstock X
Class B Members interest is acquired, (ii) the purchase is made in cash and (iii) the purchase price equals the Comstock X Class B Members capital account plus accrued priority return. Proceeds of the Comstock X
Private Placement are being utilized (A) to provide capital needed to complete the projects known as The Townes at Totten Mews, consisting of 40 townhomes in Washington, D.C., and The Towns at 1333, consisting of 18 townhomes in the City of
Alexandria, Virginia (collectively, the Investor X Projects), (B) to reimburse the Company for prior expenditures incurred on behalf of the Investor X Projects, and (C) for general corporate purposes of the Company. The Company
evaluated Comstock X and determined that the equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support and the Company was the primary beneficiary of the VIE as a result of its
complete operational control of the activities that most significantly impact the economic performance and its obligation to absorb losses, or receive benefits. Accordingly, the Company consolidates this entity. No distributions have been paid to
the Comstock X Class B Members to date.
The distributions to and contributions from the VIEs discussed above are included within the
non-controlling
interest in the consolidated balance sheets for the periods presented.
At March 31, 2017 and December 31, 2016, total assets of these VIEs were approximately $32.4 million and $38.1 million,
respectively, and total liabilities were approximately $15.5 million and $18.5 million, respectively. The classification of these assets is primarily within Real estate inventories and the classification of liabilities are
primarily within Accounts payable and accrued liabilities and Notes payable secured by real estate inventories in the accompanying consolidated balance sheets.
12. UNCONSOLIDATED JOINT VENTURE
The
Company accounts for its interest in its title insurance joint venture using the equity method of accounting and periodically adjusts the carrying value for its proportionate share of earnings, losses and distributions. The carrying value of the
investment is included within Other assets in the accompanying consolidated balance sheets and our proportionate share of the earnings from the investment are included in Other income, net in the accompanying consolidated
statements of operations for the periods presented. Our share of the earnings for the three months ended March 31, 2017 and 2016, are $18 and $8, respectively. During the three months ended March 31, 2017 and 2016, the Company collected
total distributions of $36 and $52, respectively, as a return on investment.
Summarized financial information for the unconsolidated
joint venture is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Statement of Operations:
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
66
|
|
|
$
|
45
|
|
Total expenses
|
|
|
30
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
36
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
Comstock Holding Companies, Inc. share of net income
|
|
$
|
18
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
12
13. CREDIT FACILITIES
Notes payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Construction revolvers
|
|
$
|
5,601
|
|
|
$
|
6,429
|
|
Development and acquisition notes
|
|
|
16,862
|
|
|
|
16,278
|
|
Mezzanine notes
|
|
|
1,439
|
|
|
|
1,424
|
|
Line of credit
|
|
|
2,929
|
|
|
|
2,929
|
|
|
|
|
|
|
|
|
|
|
Total secured notes
|
|
|
26,831
|
|
|
|
27,060
|
|
Deferred financing charges, net of amortization
|
|
|
(166
|
)
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
Net secured notes
|
|
|
26,665
|
|
|
|
26,927
|
|
Unsecured financing, net of unamortized deferred financing charges of $105 and $121
|
|
|
959
|
|
|
|
911
|
|
Notes payable, unsecured, net of $2.1 million discount and unamortized deferred financing
charges
|
|
|
15,944
|
|
|
|
15,866
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
$
|
43,568
|
|
|
$
|
43,704
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017, maturities and/or curtailment obligations of all borrowings are as follows:
|
|
|
|
|
2017
|
|
$
|
35,258
|
|
2018
|
|
|
6,198
|
|
2019
|
|
|
1,997
|
|
2020
|
|
|
115
|
|
|
|
|
|
|
Total
|
|
$
|
43,568
|
|
|
|
|
|
|
As of March 31, 2017, the Company had $35.3 million of its credit facilities and project related
loans scheduled to mature during the remainder of 2017, and we are in active discussions with our lenders seeking long-term extensions.
Construction, development and mezzanine debt secured
The Company enters into secured acquisition and development loan agreements from time to time to purchase and develop land parcels. In
addition, the Company enters into secured construction loan agreements for the construction of its real estate inventories. The loans are repaid with proceeds from home closings based upon a specific release price, as defined in each respective loan
agreement.
As of March 31, 2017 and December 31, 2016, the Company had secured construction revolving credit facilities with a
maximum loan commitment of $30.5 million and $26.6 million, respectively. The Company may borrow under these facilities to fund its home building activities. The amount the Company may borrow is subject to applicable borrowing base
provisions and the number of units under construction, which may also limit the amount available or outstanding under the facilities. The facilities are secured by deeds of trust on the real property and improvements thereon, and the borrowings are
repaid with the net proceeds from the closings of homes sold, subject to a minimum release price. As of March 31, 2017 and December 31, 2016, the Company had approximately $24.9 million and $20.2 million, respectively, of unused
construction loan commitments. The Company had $5.6 million and $6.4 million of outstanding construction borrowings as of March 31, 2017 and December 31, 2016, respectively. Interest rates charged under these facilities include
the London Interbank Offered Rate (LIBOR) and prime rate pricing options, subject to minimum interest rate floors. At March 31, 2017 and December 31, 2016, the weighted average interest rate on the Companys outstanding
construction revolving facilities was 4.6% per annum. The construction credit facilities have maturity dates ranging from April 2017 to March 2019, including extensions subject to the Company meeting certain conditions. Subsequent to March 31,
2017, $0.2 million of the outstanding construction revolving credit facilities matured in April 2017 and therefore, the Company secured an extension for this borrowing. See Note 16 for further discussion on the extension.
13
As of March 31, 2017 and December 31, 2016, the Company had approximately
$24.3 million and $27.8 million, respectively, of aggregate acquisition and development maximum loan commitments of which $16.9 million and $16.3 million, respectively, were outstanding. These loans have maturity dates ranging
from May 2017 to March 2019, including extensions subject to certain conditions, and bear interest at a rate based on LIBOR and prime rate pricing options, with interest rate floors ranging from 4.5% to 5.5% per annum. As of March 31, 2017
and December 31, 2016, the weighted average interest rate was 5.2% per annum.
As of March 31, 2017, the Company had one
mezzanine loan that is being used to finance the development of the Momentum | Shady Grove project. The maximum principal commitment amount of this loan was $1.1 million, of which $1.4 million of principal and accrued interest was
outstanding at March 31, 2017 and December 31, 2016. This financing carries an annual interest rate of 12% of which 6% is paid on a monthly basis with the remaining 6% being accrued and paid at maturity. This financing has a maturity date
of December 31, 2017 and is guaranteed by the Company and our Chief Executive Officer.
Line of credit secured
At March 31, 2017 and December 31, 2016, the Company had a secured revolving line of credit with a maximum capacity of
$3.0 million, of which $2.9 million was outstanding at March 31, 2017 and December 31, 2016. This line of credit is secured by the first priority security interest in the Companys wholly owned subsidiaries in the
Washington, D.C. metropolitan area and guaranteed by our Chief Executive Officer. The Company uses this line of credit to finance the predevelopment related expenses and deposits for current and future projects and bears a variable interest rate
tied to a
one-month
LIBOR plus 3.25% per annum, with an interest rate floor of 5.0%. This line of credit calls for the Company to adhere to financial covenants, as defined in the loan agreement such as,
minimum net worth and minimum liquidity, measured quarterly and minimum EBITDA measured on an annual basis and matures on December 31, 2017. As of March 31, 2017, the Company was in compliance with all financial covenants dictated by the
line of credit agreement.
Unsecured financing
As of March 31, 2017 and December 31, 2016, the Company had $0.9 million in outstanding balances under a
10-year
unsecured note with a bank. Interest is charged on this financing on an annual basis at the Overnight LIBOR rate plus 2.2%. At March 31, 2017 and December 31, 2016, the interest rate was 3.1% and
2.9% per annum, respectively. The maturity date of this financing is December 28, 2018. The Company is required to make monthly principal and interest payments through maturity.
As of March 31, 2017, the Company had one unsecured seller-financed promissory note with an outstanding balance of $0.1 million.
This financing carries an annual interest rate of the prime rate plus 5%. This financing has a maturity date of February 27, 2020, and is guaranteed by our Chief Executive Officer.
Notes payable to affiliate unsecured
Comstock Growth Fund
On October 17, 2014, CGF entered into a subscription agreement with CDS, pursuant to which CDS purchased membership interests in CGF for a
principal amount of $10.0 million (the CGF Private Placement). Other investors who subsequently purchased interests in the CGF Private Placement included members of the Companys management and board of directors and other
third party accredited investors for an additional principal amount of $6.2 million.
On October 17, 2014, the Company entered
into an unsecured promissory note with CGF whereby CGF made a loan to the Company in the initial principal amount of $10.0 million and a maximum amount available for borrowing of up to $20.0 million with a three year term (the
Original Promissory Note). On December 18, 2014, the loan agreement was amended and restated to provide for a maximum capacity of $25 million. The loan bears interest at a floating rate based on the 30 day LIBOR plus
9.75% per annum with a 10% floor per annum. Interest payments will be made monthly in arrears. There is a principal curtailment requirement of 10% annually based on the average outstanding balance for the prior year. The loan will be used by
the Company (i) to finance the Companys current and future development pipeline, (ii) to repay all or a portion of the Companys prior private placements, (iii) to repay all or a portion of the Companys project
mezzanine loans, and (iv) for general corporate purposes. The Company is the administrative manager of CGF but does not own any membership interests. The Company had approximately $12.6 million of outstanding borrowings under the CGF loan,
net of discounts, as of March 31, 2017 and December 31, 2016. As of March 31, 2017 and December 31, 2016, the interest rate was 11.4% and 10.4% per annum, respectively. For the three months ended March 31, 2017 and 2016, the
Company made interest payments of $0.4 million. During the second quarter of 2017, the Company made the second principal curtailment to CGF in the amount of $1.5 million.
14
Comstock Growth Fund II
On December 29, 2015, the Company entered into a revolving line of credit promissory note with CGF II whereby CGF II made a loan to the
Company in the initial principal amount of $5.0 million and a maximum amount available for borrowing of up to $10.0 million with a two year term, which may be extended an additional year. The interest rate is 10% per annum, and interest
payments will be accrued and paid in kind monthly for the first year, and then paid current monthly in arrears beginning December 31, 2016. The funds obtained from the loan are being used by the Company (i) to capitalize the Companys
current and future development pipeline, (ii) to repay all or a portion of the Companys prior private placements, and (iii) for general corporate purposes. As of March 31, 2017 and December 31, 2016, $3.4 million and
$3.3 million, respectively, was outstanding in principal and accrued interest under the CGF II loan.
14. FAIR VALUE DISCLOSURES
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities are reasonable estimates of their fair values based on their short maturities. The fair value of fixed and floating rate debt is based on unobservable market rates (Level 3 inputs).
The fair value of the floating rate debt was estimated using a discounted cash flow analysis on the blended borrower rates currently available
to the Company for loans with similar terms. The following table summarizes the carrying amount and the corresponding fair value of fixed and floating rate debt:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Carrying amount
|
|
$
|
43,568
|
|
|
$
|
43,704
|
|
Fair value
|
|
$
|
45,091
|
|
|
$
|
44,986
|
|
Fair value estimates are made at a specific point in time, based on relevant market information about the
financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The Company may also value its
non-financial
assets and liabilities, including items such as real
estate inventories and long lived assets, at fair value on a
non-recurring
basis if it is determined that impairment has occurred. Such fair value measurements use significant unobservable inputs and are
classified as Level 3.
15. RESTRICTED STOCK, STOCK OPTIONS AND OTHER STOCK PLANS
During the three months ended March 31, 2017, the Company issued 157 thousand stock options and 200 thousand restricted stock
awards to employees.
Stock-based compensation expense associated with restricted stock and stock options is recognized based on the fair
value of the award over its vesting period. For the three months ended March 31, 2017, total stock based compensation expense was $37 of which, $32 was charged to expenses within general and administrative and cost of
sales-other in the consolidated statement of operations, and $5 was capitalized to Real estate inventories. For the three months ended March 31, 2016, total stock based compensation cost was $31, and of this amount, $26 was
charged to expenses within general and administrative and cost of sales-other in the consolidated statement of operations, and $5 was capitalized to Real estate inventories.
Under net settlement procedures currently applicable to our outstanding restricted stock awards for employees, upon each settlement date and
election by the employees, restricted stock awards are withheld to cover the required withholding tax, which is based on the value of the restricted stock award on the settlement date as determined by the closing price of our Class A common
stock on the trading day immediately preceding the applicable settlement date. The remaining amounts are delivered to the recipient as shares of our Class A common stock.
As of March 31, 2017, the weighted-average remaining contractual term of unexercised stock options was 8 years. As of March 31, 2017
and December 31, 2016, there was $0.7 million and $0.1 million, respectively, of unrecognized compensation cost related to stock grants.
15
16. SUBSEQUENT EVENTS
In April 2017, the Company and an entity wholly owned by certain officers, directors, and employees of the Company, closed on a repurchase of
its Series B Common Stock from Gregory V. Benson, the Companys former Chief Operating Officer, and Clareth, LLC, an entity wholly owned by Mr. Benson. In addition, the Company also finalized the conversion of its Series B Preferred Stock
to its Series C Preferred Stock. For further information regarding these transactions, see the Recent Developments section within Note 1, and the Related Party Transactions within Note 9 to the consolidated financial
statements.
In April 2017, the Company repaid $0.8 million of principal related to its secured line of credit. As of March 31,
2017, the Company had $2.9 million in outstanding borrowings under this line of credit.
In April 2017, the Company extended its
revolving construction and development loan related to the Estates at Falls Grove project. This loan had an initial maturity date of April 23, 2017 and the extension provides for a maturity date of July 23, 2017. As of March 31, 2017,
the Company had $0.2 million in outstanding borrowings under this revolving credit facility.
In May 2017, the Company made the
second principal curtailment on the Amended CGF Private Placement in the amount of $1.5 million.
16
COMSTOCK HOLDING COMPANIES, INC. AND SUBSIDIARIES