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| CHCI > SEC Filings for CHCI > Form 10-Q on 13-May-2009 | All Recent SEC Filings |
13-May-2009
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS
The following discussion of our financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated interim financial statements and the notes thereto appearing elsewhere in the this report and our audited consolidated financial statements and the notes thereto for the year ended December 31, 2008, appearing in our Annual Report on Form 10-K for the year then ended (the "2008 Form 10-K").
This report includes forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by the use of words such as "anticipate," "believe," "estimate," "may," "intend," "expect," "will," "should," "seeks" or other similar expressions. Forward-looking statements are based largely on our expectations and involve inherent risks and uncertainties, many of which are beyond our control. You should not place undue reliance on any forward-looking statement, which speaks only as of the date made. Some factors which may affect the accuracy of the forward-looking statements apply generally to the real estate industry, while other factors apply directly to us. Any number of important factors which could cause actual results to differ materially from those in the forward-looking statements include, without limitation: general economic and market conditions, including interest rate levels; our ability to service our substantial debt; inherent risks in investment in real estate; our ability to compete in the Washington, D.C. and Raleigh, North Carolina and Atlanta, Georgia real estate and home building markets; regulatory actions; fluctuations in operating results; our anticipated growth strategies; shortages and increased costs of labor or building materials; the availability and cost of land in desirable areas; natural disasters; our ability to raise debt and equity capital and grow our operations on a profitable basis; and our continuing relationships with affiliates. Additional information concerning these and other important risk and uncertainties can be found under the heading "Risk Factors" in our Form 10-K filed for the fiscal year ended December 31, 2008. Our actual results could differ materially from these projected or suggested by the forward-looking statements.
Overview
We are a residential real estate developer that has substantial experience building a diverse range of products including single-family homes, townhouses, mid-rise condominiums, high-rise multi-family buildings and mixed-use (residential and commercial) developments in suburban communities and high density urban infill areas. We have historically built projects with the intent that they be sold either as fee-simple properties, condominiums, or investment properties. We focus on geographic areas, products and price points where we believe there will be continuing demand for new housing and potential for attractive returns. We operate in the Washington, D.C., Raleigh, North Carolina, and Atlanta, Georgia markets where we target first-time, early move-up, secondary move-up, and empty nester move-down buyers. We focus on the "middle-market" meaning that we tend to offer products in the middle price points in each market, avoiding the very low-end and high-end products. We believe our middle market strategy positions our products such that they are affordable to a significant segment of potential home buyers in our markets. Since our founding in 1985, and as of December 31, 2008, we have built and delivered more than 5,170 homes generating revenue in excess of $1.3 billion.
Our markets have historically been characterized by strong population and economic growth trends that have led to strong demand for traditional housing. However, the housing industry is in an unprecedented and prolonged cyclical downturn, suffering the effects of reduced demand brought on by significant increases in existing home inventory, resistance to appreciating prices of new homes, turmoil in the mortgage markets, reduced liquidity levels in the world financial markets, increasing unemployment and concerns about the health of the national and global economics. We believe over the past two decades we have gained experience that will be helpful to us as we seek to manage our business through the current difficult market environment. We believe we have taken, and are continuing to take, steps that will assist us in managing our business through the current cycle until market conditions stabilize and eventually improve. There can be no assurances, however, that we will be able to generate and maintain sufficient cash resources to survive long enough for market conditions to improve.
As a result of deteriorating market conditions, we have adjusted certain aspects of our business strategy. In 2008, we focused our energy on repositioning projects, reducing debt, reducing costs, managing liquidity, renegotiating loans with current period and near-term maturities, refinancing projects and enhancing our balance sheet. We have cancelled or postponed plans to start several new projects and either renegotiated or cancelled contracts to purchase certain other projects. As a result, we purchased no new land in 2008 or so far in 2009. We have sold certain land and other assets and taken steps to significantly reduce our inventory of speculative homes as well. Until market conditions stabilize, we will continue to focus on working through the land inventory we own. This will include continuing efforts to sell certain land parcels where we believe it is the best strategy relative to that particular asset.
While we have always preferred to purchase finished building lots that are developed by others, we have also been active in entitling and developing land for many of our home building projects. We believe it is important to have the in-house capabilities to manage the entitlement and development of land in order to position our company to be able to recognize opportunities to enhance the value of the real estate we develop and to be opportunistic in our approach to acquisitions. Nonetheless, our interest in acquiring new development projects will be focused on finished building lots until market conditions and circumstances warrant otherwise. As such, we have significantly reduced our in-house development staff.
During the past several years our business has included the development, redevelopment and construction of residential mid-rise and high-rise condominium complexes. The majority of our multi-family projects are in our core market of the greater Washington, D.C. area. We believe the demographics and housing trends in the Washington, DC area will continue to generate demand for high density housing and mixed-use developments over the long term. However, condominium sales in the greater Washington, D.C. area have declined significantly as a result of current economic conditions. In order to reduce the cost associated with carrying our condominium inventory in the Washington, DC region we are temporarily operating two of our multi-family projects as hybrid for-sale and for-rent properties. This approach provides us regular cash flow which we use to offset a portion of the carry costs associated with the applicable multi-family assets. In addition, we believe the value of the assets will increase over time as market conditions stabilize or improve. In Raleigh, North Carolina and Atlanta, Georgia, we continue to be focused on lower density housing principally single family homes.
In today's real estate market our general operating business strategy has the following key elements:
• protect liquidity and maximize capital availability;
• maximize the realized value of our real estate owned;
• utilize technology to streamline operations, reduce costs, enhance customer communications and facilitate sales
• rationalize overhead expenses;
• focus on our core markets in the Mid-Atlantic and Southeast region of the United States;
• focus on our current land inventory in our core markets;
• focus on a broad segment of the home buying market, aka the "middle market";
• create opportunities in areas overlooked by our competitors;
• maximize our economies of scale;
• aggressively prosecute existing litigation to recover costs and damages caused by others.
Our business was founded in 1985 by Christopher Clemente, our current Chief
Executive Officer, as a residential land developer and home builder focused on
the move-up home market in the Northern Virginia suburbs of the Washington, D.C
area. Prior to our initial public offering in December 2004, we operated our
business through four primary holding companies. In connection with our initial
public offering, these primary holding companies were consolidated and merged
into Comstock Homebuilding Companies, Inc., which was incorporated in Delaware
in May 2004. Our principal executive offices are located at 11465 Sunset Hills
Road, Suite 510, Reston, Virginia 20190, and our telephone number is
(703) 883-1700. Our Web site is www.comstockhomebuilding.com. References to
"Comstock," "we," "our" and "us" refer to Comstock Homebuilding Companies, Inc.
together in each case with our subsidiaries and any predecessor entities unless
the context suggests otherwise.
At March 31, 2009, we either owned or controlled under option agreements approximately 1,800 building lots. The following table summarizes certain information related to new orders, settlements, and backlog for the three month period ended March 31, 2009 and 2008:
Three months ended March 31, 2009
Washington DC Metro North Carolina Georgia Total
Gross new orders 12 13 - 25
Cancellations - 3 - 3
Net new orders 12 10 - 22
Gross new order revenue $ 5,614 $ 2,319 $ - $ 7,933
Cancellation revenue $ - $ 523 $ - $ 523
Net new order revenue $ 5,614 $ 1,796 $ - $ 7,410
Average gross new order price $ 468 $ 178 $ - $ 317
Settlements 8 4 - 12
Settlement revenue-homebuilding $ 4,160 $ 566 $ - $ 4,726
Average settlement price $ 520 $ 142 $ - $ 394
Backlog units 7 12 1 20
Backlog revenue $ 2,189 $ 2,983 $ 386 $ 5,558
Average backlog price $ 313 $ 249 $ 386 $ 278
Three months ended March 31, 2008
Washington DC Metro North Carolina Georgia Total
Gross new orders 23 18 9 50
Cancellations 4 8 4 16
Net new orders 19 10 5 34
Gross new order revenue $ 8,159 $ 4,194 $ 2,773 $ 15,125
Cancellation revenue $ 1,379 $ 2,726 $ 955 $ 5,060
Net new order revenue $ 6,780 $ 1,467 $ 1,818 $ 10,065
Average gross new order price $ 355 $ 233 $ 308 $ 302
Settlements 16 22 10 48
Settlement revenue-homebuilding $ 6,062 $ 6,474 $ 3,404 $ 15,940
Average settlement price $ 379 $ 294 $ 340 $ 332
Backlog units 16 27 14 57
Backlog revenue $ 4,529 $ 7,915 $ 4,646 $ 17,090
Average backlog price $ 283 $ 293 $ 332 $ 300
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We currently have communities under development in multiple counties throughout the markets we serve. The following table summarizes certain information for our current and planned communities as of March 31, 2009:
Lots under
Product Estimated Lots Option
Type Units at Units Backlog Owned Agreement Average New Order
Project State (2) Completion Settled (3) Unsold Unsold Revenue to Date
Status: Available for Sales (1)
Allen Creek GA SF 26 23 - 3 - $ 204,987
Arcanum GA SF 34 24 - 10 - $ 376,173
Falling Water GA SF 22 18 - 4 - $ 422,513
Gates at Luberon GA SF 31 3 - 28 - $ 618,259
Glenn Ivey GA SF 20 18 - 2 - $ 227,039
James Road GA SF 10 9 - 1 - $ 339,847
Post Road GA SF 60 - - 60 - n/a
Wyngate GA SF 4 3 1 - - $ 409,160
Sub-Total / Weighted Average (4) 207 98 1 108 - $ 323,079
Emerald Farm MD SF 84 78 - 6 - $ 452,347
Sub-Total / Weighted Average (4) 84 78 - 6 - $ 452,347
Allyn's Landing (5) NC TH 108 81 3 24 - $ 237,231
Brookfield Station (5) NC SF 62 15 - 47 - $ 222,757
Haddon Hall NC Condo 90 29 1 60 - $ 158,399
Holland Road (5) NC SF 81 18 2 61 - $ 438,324
Providence-SF (5) NC SF 58 24 6 28 - $ 194,923
Riverbrooke NC SF 66 47 - 19 - $ 166,608
Wakefield Plantation (5) NC TH 77 49 - 28 - $ 483,042
Wheatleigh Preserve NC SF 28 18 - 10 - $ 279,204
Sub-Total / Weighted Average (4) 570 281 12 277 - $ 270,172
Commons on Potomac Sq VA Condo 191 86 - 105 - $ 233,546
Commons on Williams Sq VA Condo 180 141 2 37 - $ 338,271
Penderbrook VA Condo 424 301 - 123 - $ 257,029
River Club II VA Condo 112 9 4 99 - $ 253,542
The Eclipse on Center Park VA Condo 465 370 1 94 - $ 405,476
Sub-Total / Weighted Average (4) 1,372 907 7 458 - $ 327,736
Total Available for Sales 2,233 1,364 20 849 - $ 322,239
Status: Development (1)
Shiloh Road I GA SF 60 - - 60 - n/a
Tribble Lakes GA SF 167 - - 167 - n/a
Sub-Total / Weighted Average (4) 227 - - 227 - n/a
Massey Preserve NC SF 187 - - 187 - n/a
Providence-TH NC TH 18 - - 18 - n/a
Sub-Total / Weighted Average (4) 205 - - 205 - n/a
Beacon Park VA Condo 488 - - - 488 n/a
Station View VA TH 47 - - 47 - n/a
Sub-Total / Weighted Average (4) 535 - - 47 488 n/a
Total Development 967 - - 479 488 n/a
Total Active & Development 3,200 1,364 20 1,328 488 $ 322,239
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(1) "Available for Sales" communities have built or partially built inventory available for sales. "Development" communities are in the development process or are on hold and have no building inventory available for sales.
(2) "SF" means single family home, "TH" means townhouse and "Condo" means condominium.
(3) "Backlog" means we have an executed order with a buyer but the settlement has not yet taken place.
(4) "Weighted Average" means the weighted average new order sale price.
(5) Considered 'active' for accounting purposes - see Note 5 of the accompanying financial statements
Results of Operations
Three months ended March 31, 2009 compared to three months ended March 31, 2008
Orders, cancellations and backlog
Gross new order revenue for the three months ended March 31, 2009 decreased $7.2 million, or 47.5%, to $7.9 million on 25 homes as compared to $15.1 million on 50 homes for the three months ended March 31, 2008. Net new order revenue for the quarter ended March 31, 2009 decreased $2.7 million, or 26.3%, to $7.4 million on 22 homes as compared to $10.1 million on 34 homes for the quarter ended March 31, 2008. The 25 unit decrease in gross new orders and the 12 unit decrease in net new orders are attributable to current market conditions in the homebuilding industry which are characterized by a general excess supply of homes available for sale and reduced buyer confidence.
Average gross new order revenue per unit for the three months ended March 31, 2009 increased $15,000 to $317,000, as compared to $302,000 for the three months ended March 31, 2008. This increase is due to the sale of a penthouse unit at our Eclipse project for approximately $1.3 million.
For the three months ended March 31, 2009 we experienced 3 order cancellations totaling $0.5 million of cancellation revenue as compared to 16 orders totaling $5.1 million for the comparable period in 2008. All three cancellations in the first quarter of 2009 were in our Raleigh, N.C. market. This is in contrast to the first quarter of 2008 where we experienced cancellations in all three markets.
Our cancellation rate for the three months ended March 31, 2009 was 12.0% on 25 gross new orders compared to cancellation rate of 32.0% on 50 gross new orders for the comparable period in 2008. In the Raleigh market our cancellation rate was 23.0%, or 3 cancellations on 13 gross new orders. Cancellation rates in general are being fueled by the tightening of the mortgage credit markets and by extended selling periods for resale homes. Our buyers' inabilities to obtain mortgage financing and/or to resell their homes are significant contributors to cancellations. Our backlog at March 31, 2009 decreased $11.5 million, or 67.4%, to $5.6 million on 20 homes as compared to our backlog at March 31, 2008 of $17.1 million on 57 homes. The reduction of backlog is indicative of the generally slow market conditions in the homebuilding industry.
Revenue
The number of homes delivered for the three months ended March 31, 2009 decreased by 75.0%, or 36 homes, to 12 as compared to 48 homes for the three months ended March 31, 2008. The reduction in new home deliveries was largely attributable to the overall real estate industry contraction. Average revenue per home delivered increased by approximately $62,000 or 18.6% to $394,000 for the three months ended March 31, 2009 as compared to $332,000 for the three months ended March 31, 2008.
Revenue from homebuilding decreased by $11.2 million, or 70.0%, to $4.7 million for the three months ended March 31, 2009 as compared to $15.9 million for the three months ended March 31, 2008. This reduction in revenue from homebuilding is attributable to lower overall volume of unit settlements which is in part the result of a smaller backlog of units at the beginning of the quarter.
Other Revenue
Other revenue for the three months ended March 31, 2009 increased by $0.4 million, or 82.8%, to $0.8 million, as compared to $0.4 million for the three months ended March 31, 2008. Other revenue for the three months ended March 31, 2009 includes $0.7 million of rental revenue from our Penderbrook and Eclipse communities. Other revenue during the first quarter of 2008 is primarily attributable to rental revenue from our Barrington Park and Penderbrook communities. During the third quarter of 2008, Barrington Park was foreclosed upon by the lender and we commenced rental operations at the Eclipse community.
Cost of Sales
Cost of sales for the three months ended March 31, 2009 decreased by $9.8 million, or 70.5%, to $4.1 million, or 87.2% of homebuilding revenue, as compared to $13.9 million, or 87.4% of revenue, for the three months ended March 31, 2008. This decrease is the result of reduced revenue from homebuilding.
Impairments and write-offs
As discussed in Note 2 in the accompanying notes to the consolidated financial statements, we recorded impairment and write-off charges of zero and $0.8 million for the three months ended March 31, 2009 and 2008, respectively. Impairments in the first quarter of 2008 consisted of two communities in the greater Atlanta area. Based on management's assessment of current market conditions and estimates for the future, we believe there are no additional impairments warranted at this time. However, if market conditions deteriorate, actual costs are higher than budgeted or we consent to foreclosures by our lenders on certain assets, we would be required to re-evaluate the recoverability of our real estate held for development and sale and may incur additional impairment charges.
Selling, general and administrative
Selling general and administrative expenses for the three months ended March 31, 2009 decreased $1.2 million or 31.6% to $2.6 million, as compared to $3.8 million for the three months ended March 31, 2008. The reduction is attributable to decreased salary, bonus and other personnel related expenses in conjunction with a continuing effort to make strategic reductions in personnel and related costs.
Operating loss
The operating loss for the three months ended March 31, 2009 of $(2.9) million was unchanged compared to $(2.9) million for the three months ended March 31, 2008. Operating margin for the three months ended March 31, 2009 was (54.5%) as compared to (18.3%) for the three months ended March 31, 2008. The decrease in operating margin is primarily a result of the reduction in revenue discussed above.
Other (income) expense, net
Other (income) expense, net for the three months ended March 31, 2009 decreased by $0.8 million to $(0.4) million as compared to $(1.2) million for the three months ended March 31, 2008. For the three months ended March 31, 2008, approximately $(1.0) million of income was generated from the forfeiture of buyer earnest money deposits at the Eclipse project. For the three months ended March 31, 2009, there was no income generated from forfeited deposits and approximately $(0.3) million of gains recognized on agreements with trade vendors to settle obligations for amounts less than those carried in accounts payable.
Liquidity and Capital Resources . . .
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