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CHCI > SEC Filings for CHCI > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for COMSTOCK HOLDING COMPANIES, INC.


15-May-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Please see "Cautionary Notes Regarding Forward-looking Statements" for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including, but not limited to, those discussed below and elsewhere in this report, particularly under the headings "Cautionary Notes Regarding Forward-looking Statements."

Overview

We are a multi-faceted real estate development and services company. We have substantial experience with building a diverse range of products including apartments, single-family homes, townhouses, mid-rise condominiums, high-rise multi-family condominiums and mixed-use (residential and commercial) developments. We operate our business through three segments: Homebuilding, Apartment Buildings and Real Estate Services as further discussed in Note 8 of our consolidated financial statements. We are currently focused on the Washington, D.C. market, which is the eighth largest metropolitan statistical area in the United States.

Homebuilding

Our expertise in developing traditional and non-traditional housing products enables us to focus on a wide range of opportunities within our core market. For our homebuilding operations, we develop properties with the intent that they be sold either as fee-simple properties or condominiums to individual unit buyers or as investment properties sold 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. We believe our middle market strategy positions our products such that they are affordable to a significant segment of potential home buyers in our market.

Apartment Buildings

Comstock's focus on the apartment sector is on developing 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. When developing rental communities, we design our products to be affordable for tenants that fit one of two groups: (i) young first-time renters, or (ii) renters by choice. The multi-family asset class has benefitted from turmoil in the new home industry, limited access to residential mortgage financing and market conditions that have driven down construction costs during the past few years. Continued favorable economic and employment conditions in the Washington, D.C. market have caused rents to rise while vacancy rates and cap rates have declined.

Real Estate Services

Our management team has significant experience 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, general contracting and other real estate related services to other property owners. This business line not only allows us to generate fee income from our highly qualified personnel but also serves as a potential catalyst for joint venture and acquisition opportunities.

We believe that our significant experience over the past 25 years, combined with our ability to navigate through two major housing downturns (early 1990s and late 2000s) have provided us the experience necessary to capitalize on attractive opportunities in our core market of Washington, D.C. and to rebuild shareholder value. We believe that our focus on the Washington, D.C. market, which has historically been characterized by economic conditions less volatile than many other major homebuilding markets, will provide an opportunity to generate attractive returns on investment and for growth.


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Recent Developments

Comstock Investors VII, L.C

On March 14, 2013, Comstock Investors VII, L.C. ("Investors VII"), a subsidiary of the Company, entered into subscription agreements (each a "Subscription Agreement") with certain accredited investors (the "Purchasers," and each a "Purchaser"), pursuant to which the Purchasers purchased membership interests ("Interests") in Investors VII for an initial aggregate amount of $6,995 of a final $7,295 capital raise (the "Private Placement"). Subsequent to March 31, 2013, the Company received the remaining $300 under the Subscription Agreements. Purchasers included unrelated third-party accredited investors along with members of the Company's board of directors and the Chief Operating Officer, Chief Financial Officer and General Counsel of the Company. The Subscription Agreement provides that the Purchasers are entitled to a cumulative, compounded, preferred return of 20% per annum, compounded annually on their capital account balances. After six months, the Company has the right to repurchase the Interests of the Purchasers, provided that (i) all of the Purchasers' Interests are acquired, (ii) the purchase is made in cash and (iii) the purchase price equals the Purchasers' capital account plus an amount necessary to cause the preferred return to equal a cumulative cash on cash return equal to 20% per annum. The Private Placement provides capital related to the current and planned construction of the Company's following projects: The Residences at Shady Grove in Rockville, Maryland consisting of 36 townhomes, The Hampshires project in Washington, D.C. consisting of 38 single family residences and 73 townhomes, and the Falls Grove project in Prince William County, Virginia consisting of 110 townhomes and 19 single family homes (collectively, the "Projects"). Proceeds of the Private Placement are to be utilized (i) to provide capital needed to complete the Projects in conjunction with project financing for the Projects,
(ii) to reimburse the Company for prior expenditures incurred on behalf of the Projects, and (iii) for general corporate purposes of the Company.

As part of the Private Placement, the Company also issued warrants to purchase shares of the Company's Class A Common Stock ("Class A Common Stock") ("Warrants," and each a "Warrant") to Purchasers who are not officers, directors or affiliates of the Company that purchased Interests that equaled or exceeded an initial investment amount of $250. The Warrants represent the right to purchase up to 116 shares of Class A Common Stock, the maximum aggregate amount of warrants approved for issuance under the Private Placement. The Warrants have an initial exercise price which is equal to the average of the closing price of the Class A Common Stock of the 20 trading days preceding the issuance of the Warrant. The Warrants contain a cashless exercise provision. In the event the Purchasers exercise the Warrants on a cashless basis, the Company will not receive any proceeds. Warrants may be exercised at any time prior to March 14, 2023.

Comstock Redland Road, L.C.

On March 25, 2013, Comstock Redland Road, L.C., a subsidiary of the Company ("Redland"), entered into a Revolving Credit Line Deed of Trust, Security Agreement, and Fixture Filing, Loan Agreement, Revolving Construction Loan Promissory Note, Development Loan Promissory Note, and related documents (the "TH Loan Documents") with EagleBank pursuant to which Redland secured a $10.4 million acquisition, development and construction loan and letter of credit facility ("TH Loan") for a mix of 39 townhomes and single family homes at the Residences at Shady Grove project in Rockville, Montgomery County, Maryland (the "TH Project") and a $2.4 million acquisition and development loan ("Apt Loan") for a 117-unit multi-family residential building known as BLVD Shady Grove, in Rockville, Montgomery County, Maryland (the "Apt Project"). Under the terms of the TH Loan Documents, there is a 24 month maturity date, and an interest rate at LIBOR plus three percent (3%), subject to an interest rate floor of 5%. Under the Apt Loan, there is a 12 month maturity date and an interest rate at LIBOR plus three percent (3%), subject to an interest rate floor of 5%. The TH Loan and Apt Loan are secured by the TH Project, Apt Project, and fully guaranteed by the Company.

On March 25, 2013, the Company, through Redland, entered into a Loan Agreement, Deed of Trust, Security Agreement and Fixture Filing, Promissory Note, and related documents (the "Secondary Loan Documents") with Eagle Commercial Ventures, LLC ("Secondary Lender") for acquisition and development of the TH Project and the Apt Project totaling $3.2 million. Under the terms of the Secondary Loan Documents, there is a 24 month maturity date for the TH Loan, and a 12 month maturity date for the Apt Loan, and both loans provide for an interest rate at 12%, with payment of interest only at 6% and accrual of the remaining 6% until maturity. The Secondary Loan is secured by a second trust on the TH Project and Apt Project, and fully guaranteed by the Company and the Company's Chief Executive Officer.

Comstock Yorkshire, L.C.

On May 8, 2013, the Company, through its Comstock Yorkshire, L.C. subsidiary ("Yorkshire"), entered into a loan agreement and related documents with Cardinal Bank pursuant to which Yorkshire secured a $5.2 million acquisition and development loan and a $2.5 million revolving construction loan (collectively, the "Yorkshire Loan") to finance the Company's project known as Falls Grove located in Prince William County, Virginia (the "Yorkshire Project"). Under the terms of the Yorkshire Loan, the loan provides for an initial variable interest rate of Prime plus one half percent (.5%) with an interest rate floor of 4.5%. The Yorkshire Loan has a maturity date of 24 months so long as Yorkshire has maintained an annual sales pace of twenty-four (24) contracts and twelve
(12) settlements of units in the Yorkshire Project within the twelve (12) month period following the closing of the Yorkshire Loan. There is no prepayment penalty associated with the Yorkshire Loan, which is secured by a first deed of trust on the Yorkshire Project. The Yorkshire Loan is fully guaranteed by the Company, with a limited guaranty by the Chief Executive Officer and Chief Operating Officer of the Company.


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Stonehenge Funding, L.C.

On March 14, 2013, Stonehenge Funding, LC ("Stonehenge"), an entity wholly-owned by the Chief Executive Officer of the Company, entered into an Extension Agreement of the Amended and Restated Senior Note with the Company to extend the maturity date of the financing arrangement to January 1, 2016. Under the terms of the Extension Agreement, the Company is required to pay $50 monthly to Stonehenge, to be allocated first to accrued and unpaid interest and then to unpaid principal outstanding, beginning on April 1, 2013. The Extension Agreement was subject to the approval by the Company's board of directors and approval was obtained on March 21, 2013.

Results of Operations

Three months ended March 31, 2013 compared to three months ended March 31, 2012

Orders, cancellations and backlog

Gross new order revenue, consisting of revenue from all units sold, for the three months ended March 31, 2013 increased $14.5 million to $18.3 million on 39 units as compared to $3.8 million on 20 units for the three months ended March 31, 2012. Net new order revenue, representing revenue for all units sold less revenue from cancellations, for the three months ended March 31, 2013 increased $11.4 million to $15.2 million on 33 units as compared to $3.8 million on 20 units for the three months ended March 31, 2012. Average gross new order revenue per unit for three months ended March 31, 2013 increased $279 to $469, as compared to $190 for the three months ended March 31, 2012. The increase is related directly to the unit mix of units settled. For the three months ended March 31, 2013, gross new orders totaled one unit at Penderbrook, 10 units at Eclipse, 6 units at The Hampshires and 22 units at Eastgate, as compared to 19 units at Penderbrook and one unit at Eclipse for the three months ended March 31, 2012.

We have three Washington, D.C. projects where we currently have units available for sale: the Eclipse at Potomac Yard in Arlington, VA, The Hampshires in Northeast, Washington D.C. and Eastgate in Chantilly, VA. As of March 31, 2013, there were 2 units in backlog for a total of $1.0 million related to the Eclipse project. Because unit sales at this project are generated from completed inventory, we do not need to construct units after a sales contract is executed with a unit purchaser. As a result, we are able to quickly execute on a sales contract and deliver the unit to the purchaser with deliveries typically made within thirty days of contract execution. The Hampshires project began settling units in March 2013 and at March 31, 2013, there were 5 units in backlog for a total of $3.3 million. The Eastgate project began settling units in March 2013 and at March 31, 2013, there were 15 units in backlog for a total of $5.4 million. Unit sales at The Hampshires and Eastgate projects are generated from inventory that must be developed and constructed, thus the delivery of the units to the purchaser typically is made within 90 to 120 days from execution of the sales contract with the purchaser. At March 31, 2013, we had a total of 22 units in backlog to generate revenue of $9.7 million. The Company exited the Penderbrook project with the settlement of two remaining units in January 2013.

Revenue - homebuilding

The number of homes delivered for the three months ended March 31, 2013 increased to 21 as compared to 17 homes for the three months ended March 31, 2012. Average revenue per home delivered increased by approximately $356 to $543 for the three months ended March 31, 2013 as compared to $187 for the three months ended March 31, 2012. Revenue from homebuilding increased by $8.2 million to $11.4 million for the three months ended March 31, 2013 as compared to $3.2 million for the three months ended March 31, 2012 which resulted in the increase in the number of homes settled and the mix of units sold. For the three months ended March 31, 2013, the Company settled 21 units (two units at Penderbrook, eight units at Eclipse, six units at The Hampshires and five units at Eastgate), as compared to 17 units (16 units at Penderbrook and one unit at Eclipse) for the three months ended March 31, 2012.

Revenue - other

Revenue-other decreased approximately $0.6 million to $0.2 million during the three months ended March 31, 2013, as compared to $0.8 million for the three months ended March 31, 2012. Included in the 2013 revenue was approximately $0.1 million of revenue from real estate services. The decrease relates to the continued decrease in the number of rental units at Penderbrook and Eclipse and the completion of several of the general contracting projects in 2012.

Cost of sales - homebuilding

Cost of sales - homebuilding for the three months ended March 31, 2013 increased by $6.0 million to $8.8 million, as compared to $2.8 million for the three months ended March 31, 2012. The unit mix and number of homes settled during the quarter accounted for the increase in the aggregate cost of sales figure.

Cost of sales - other

Cost of sales - other decreased approximately $0.9 million to $0.2 million during the three months ended March 31, 2013 as compared to $1.1 million in the three months ended March 31, 2012. As a result of the continued absorption of the condominium units at Penderbrook and Eclipse, the number of units used in rental operations has been significantly reduced over the past twelve months, attributing to the significant decrease.

Selling, general and administrative

Selling, general and administrative expenses for the three months ended March 31, 2013 increased $0.1 million to $2.0 million, as compared to $1.9 million for the three months ended March 31, 2012. The increase in expenses is attributable to labor and costs related to the Company's pursuit of new business opportunities.


Table of Contents

Interest, real estate taxes and indirect costs related to active and inactive projects

Interest and real estate taxes incurred relating to the development of lots and parcels are capitalized to real estate held for development and sale during the active development period, which generally commences when development and construction activities begin and ends when the properties are substantially complete or the property becomes inactive which means that 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 held for development and sale are expensed as a component of cost of sales as related units are sold. When a project becomes inactive, its interest, real estate taxes and indirect overhead costs are no longer capitalized but rather expensed in the period in which they are incurred. During the three months ended March 31, 2013, only one of our projects was determined to be inactive for accounting purposes, as compared to all at March 31, 2012. Refer to Note 6 to the Consolidated Financial Statements for the breakdown of the interest, real estate taxes and indirect costs related to active and inactive projects reported on the Consolidated Statement of Operations.

Income taxes

Income taxes are accounted for under the asset and liability method in accordance with ASC 740, "Accounting for Income Taxes," ("ASC 740"). Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The effective tax rate for the three months ended March 31, 2013 and 2012 was 0%, respectively.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company recorded valuation allowances for certain tax attributes and other deferred tax assets. At this time, sufficient uncertainty exists regarding the future realization of these deferred tax assets through future taxable income or carry back opportunities. If, in the future, the Company believes that it is more likely than not that these deferred tax benefits will be realized, the valuation allowances will be reversed. With a full valuation allowance, any change in the deferred tax asset or liability is fully offset by a corresponding change in the valuation allowance. This resulted in a zero deferred tax benefit or expense for the three months ended March 31, 2013 and 2012.

We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. The 2009 through 2012 tax years generally remain subject to examination by federal and most state tax authorities.

Liquidity and Capital Resources

We require capital to operate, to post deposits on new deals, 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 will continue to include, funds derived from various secured and unsecured borrowings, cash flow from operations, which includes the sale and delivery of constructed homes, rental apartment projects, finished and raw building lots and the sale of equity and debt securities.

The Company is involved in ongoing discussions with lenders and potential equity investors in an effort to provide additional growth capital to fund various new business opportunities. We are anticipating that through a combination of current available cash on hand, the additional cash from settlement proceeds, and the cash generated from settlements at our new communities currently under development that the Company will have sufficient financial resources to sustain our operations through 2013.

Credit Facilities

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 property. The Company has generally financed its development and construction activities on a single or multiple project basis so it is not uncommon for each project or collection of projects the Company develops and builds to have a separate credit facility. Accordingly, the Company typically has had numerous credit facilities and lenders. Refer to Note 14 in the Consolidated Financial Statements for details of our credit facilities and maturities and/or curtailment obligations of all of our borrowings.

Cash Flow

Net cash provided by operating activities was $4.0 million for the three months ended March 31, 2013. This represents an increase from the net cash used in operating activities of $1.1 million for the three months ended March 31, 2012. The increase is primarily attributable to the increase in settlement activity. Additionally, the 2012 cash flows from operating activities do not reflect the net cash flows from the sale of the Cascades Apartments of approximately $4.7 million. Although the construction, development and sale of this and potentially other future merchant build projects are an ongoing component of the Company's operations, the net cash flows are presented within the investing and financing section of the accompanying consolidated statement of cash flows.

Net cash provided by investing activities was $0.2 million for the three months ended March 31, 2013, primarily attributable to receipt of the remaining escrow balance from the sale of the Cascades Apartments in 2012. Net cash provided by investing activities was $18.4 million for the three months ended March 31, 2012, primarily attributable to the sale of the Cascades Apartments.


Table of Contents

Net cash provided by financing activities was $1.5 million for the three months ended March 31, 2013, primarily attributable to the proceeds received from the Comstock Investor VII, L.C. Private Placement and $9.3 million in proceeds from notes payable, net of $14.7 million in payments made on notes payable. Net cash used in financing activities was $15.0 million for the three months ended March 31, 2012, primarily attributable to the extinguishment of debt and retirement of the non-controlling interests, including preferred returns, in full related to the Cascades Apartments.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates during the three months ended March 31, 2013 compared with those disclosed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2012.

Cautionary Notes Regarding Forward-looking Statements

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 debt; inherent risks in investment in real estate; our ability to compete in the markets in which we operate; economic risks in the markets in which we operate, including actions related to government spending; delays in governmental approvals and/or land development activity at our projects; 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2012. Our actual results could differ materially from these projected or suggested by the forward-looking statements.

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