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CHCI > SEC Filings for CHCI > Form 10-Q on 12-Nov-2013All Recent SEC Filings

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Form 10-Q for COMSTOCK HOLDING COMPANIES, INC.


12-Nov-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." References to dollar amounts are in thousands except per share data.

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.

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, Apartments 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.

We currently have communities under development in multiple counties throughout the Washington, D.C. market. At September 30, 2013, we either owned or controlled under purchase option agreements approximately 657 building lots.


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The following table summarizes certain information for our owned or controlled communities as of September 30, 2013:

                                                                                               As of September 30, 2013
                                                             Estimated                                                                                             Average New
                                               Product        Units at           Units                              Lots Owned         Lots under Option          Order Revenue
Project                              State     Type (2)      Completion         Settled         Backlog (3)           Unsold           Agreement Unsold         Per Unit to Date
The Hampshires (1)                    DC          SF                  38              13                   6                 19                        -        $             735
                                                  TH                  73               5                   4                 64                        -        $             545
Villas at Eastgate (1)                VA        Condo                 66              24                  25                 -                         17       $             385
Falls Grove (1)                       VA          SF                  19              -                   -                  19                        -        $              -
                                                  TH                 110              -                   10                100                        -        $             289
Residences at Shady Grove (1)         MD        TH/SF                 39              -                    5                 34                        -        $             579
BLVD Shady Grove (1)                  MD          MF                 117              -                   -                 117                        -        $              -
Emerald Farm (4)                      MD          SF                  84              78                  -                   6                        -        $             452
BLVD Newell (5)                       MD          MF                 144              -                   -                  -                        144       $              -
Maxwell Square (5)                    MD          TH                  45              -                   -                  45                        -        $              -
Hall Road (5)                         VA          TH                  42              -                   -                  42                        -        $              -

Total                                                                777             120                  50                446                       161       $             463

(1) Community in development and/or construction with units available for sale.

(2) "SF" means single family home, "TH" means townhouse, "Condo" means condominium and "MF" means multi family.

(3) "Backlog" means we have an executed order with a buyer but the settlement has not yet taken place.

(4) Developed and currently inactive.

(5) Development and construction activities have not began.

Results of Operations

Three and nine months ended September 30, 2013 compared to three and nine months ended September 30, 2012

Orders, cancellations and backlog

The following table summarizes certain information related to new orders, settlements and backlog for the three and nine month periods ended September 30, 2013 and 2012:

                                          Three Months Ended September 30,               Nine Months Ended September 30,
                                            2013                     2012                  2013                   2012

Gross new orders                                     31                      16                   118                     50
Cancellations                                         4                       3                    14                      3
Net new orders                                       27                      13                   104                     47
Gross new order revenue               $          14,476         $         7,019       $        55,883        $        14,841
Cancellation revenue                  $           1,680         $           875       $         6,241        $           875
Net new order revenue                 $          12,796         $         6,144       $        49,643        $        13,966
Average gross new order price         $             467         $           438       $           474        $           297
Settlements                                          20                      12                    63                     41
Settlement revenue - homebuilding     $           9,211         $         2,527       $        32,593        $         9,479
Average settlement price              $             461         $           211       $           517        $           231
Backlog units                                        50                       9                    50                      9
Backlog revenue                       $          22,470         $         5,111       $        22,470        $         5,111
Average backlog price                 $             449         $           568       $           449        $           568

Revenue - homebuilding

The number of homes delivered for the three months ended September 30, 2013 increased to 20 as compared to 12 homes for the same period in the prior year. The number of homes delivered for the nine months ended September 30, 2013 increased to 63 as compared to 41 homes for the nine months ended September 30, 2012. Average revenue per home delivered increased by approximately $250 to $461 for the three months ended September 30, 2013 as compared to $211 for the three months ended September 30, 2012. Average revenue per home delivered increased by approximately $286 to $517 for the nine months ended September 30, 2013 as compared to $231 for the nine months ended September 30, 2012. Revenue from homebuilding increased by $6.7 million to $9.2 million for the three months ended September 30, 2013 as compared to $2.5 million for the same period in the prior year which resulted from the increase in the number of homes and the mix of units settled. Revenue from homebuilding increased by $23.1 million to $32.6 million for the nine months ended September 30, 2013 as compared to $9.5 million for the nine months ended September 30, 2012. For the three months ended September 30, 2013, the Company settled 20 units (7 units at The Hampshires and 13 units at Eastgate), as compared to 12 units (11 units at Penderbrook and 1 units at Eclipse) for the three months ended September 30, 2012. For the nine months ended September 30, 2013, 63 units were settled (2 units at Penderbrook, 19 units at Eclipse,


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18 units at The Hampshires and 24 units at Eastgate), as compared to 41 units (36 units at Penderbrook and 5 units at Eclipse) for the nine months ended September 30, 2012. In addition, our homebuilding gross margin percentage for the three months ended September 30, 2013 increased by 8.4% to 25.6%, as compared to 17.2% for the three months ended September 30, 2012. Our homebuilding gross margin for the nine months ended September 30, 2013 increased by 8.5% to 22.5%, as compared to 14.0% for the nine months ended September 30, 2012. The increase noted in revenue and margins was a result of the increase in the number of homes and the mix of units settled and the Company exiting legacy projects that were impaired. Excluding the impact of the release of the warranty reserve discussed in Note 5, gross margin percentage was 21.3% for the three and nine months ended September 30, 2013.

Revenue - other

Revenue-other decreased approximately $0.6 million to $0.4 million during the three months ended September 30, 2013, as compared to $1.0 million for the three months ended September 30, 2012. Revenue-other decreased approximately $1.5 million to $0.7 million during the nine months ended September 30, 2013, as compared to $2.2 million for the nine months ended September 30, 2012. The decrease primarily relates to revenue from rental operations, as the number of rental units at Penderbrook and Eclipse continued to decline until all units were sold in the second quarter of 2013. The completion of several of the general contracting projects in 2012 also contributed to the decline.

Cost of sales - homebuilding

Cost of sales - homebuilding for the three months ended September 30, 2013 increased by $4.8 million to $6.9 million, as compared to $2.1 million for the three months ended September 30, 2012. Cost of sales - homebuilding for the nine months ended September 30, 2013 increased by $17.2 million to $25.3 million, as compared to $8.1 million for the nine months ended September 30, 2012. The unit mix and number of homes settled during the quarter and the year accounted for the increase in the aggregate cost of sales figure.

Cost of sales - other

Cost of sales - other decreased approximately $1.0 million to $100 during the three months ended September 30, 2013 as compared to $1.1 million in the three months ended September 30, 2012. Cost of sales - other decreased approximately $2.4 million to $600 during the nine months ended September 30, 2013 as compared to $3.0 million in the nine months ended September 30, 2012. As a result of the continued absorption and sale of the condominium units at Penderbrook and Eclipse, the decline in the number of units used in rental operations resulted in a significant decrease in cost of sales - other. Additionally, the completion of several general contracting projects in 2012 also contributed to the decline.

Impairment reversal and charge

There was no impairment charge for the three and nine months ended September 30, 2013 as compared to $2,358 for the three and nine months ended September 30, 2012. Due to a revision in previous disposition strategy, the Company reversed a previously recorded impairment charge of $722 for the nine months ended September 30, 2013. There were no similar actions in the comparable period in the prior year. Refer to Note 16 to the consolidated financial statements for further discussions and the basis for the impairment reversal and charges.

Sales and marketing

Sales and marketing expenses for the three months ended September 30, 2013 increased $300 to $500, as compared to $200 for the three months ended September 30, 2012. Sales and marketing expenses for the nine months ended September 30, 2013 increased $900 to $1.4 million, as compared to $500 for the nine months ended September 30, 2012. The increase in sales and marketing expenses over the three and nine month period is directly attributable to increases in active developments and marketing efforts, which resulted in an increase in homes ordered and delivered.

General and administrative

General and administrative expenses for the three months ended September 30, 2013 decreased $300 to $1.7 million, as compared to $2.0 million for the three months ended September 30, 2012. General and administrative expenses for the nine months ended September 30, 2013 decreased $700 to $5.0 million as compared to $5.7 million for the nine months ended September 30, 2012. The decrease in general and administrative expenses over the three and nine month period is attributable to increased utilization of operations employees as a result of the increase in active selling and developing communities.

Income taxes

The Company has recorded a tax provision of $197 for the three and nine month periods ended September 30, 2013, based on an effective tax rate of 12%, related to statutory tax rates in jurisdictions where the Company has no deferred tax benefit to offset the tax liability. No such provision was recorded in the three and nine month periods ended September 30, 2012.


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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, project level equity raises 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, proceeds from debt, project level raises and the cash generated from settlements at our new communities currently under development, 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 15 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 used in operating activities was $6.0 million for the nine months ended September 30, 2013. This represents an increase from the net cash used in operating activities of $5.1 million for the nine months ended September 30, 2012. The increase is primarily attributable to the increase in real estate inventories as the Company continues to invest in new projects in line with the uptick in the housing market and 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 required to be presented within the investing and financing section of the accompanying consolidated statement of cash flows.

Net cash provided by investing activities was $200 for the nine months ended September 30, 2013, primarily attributable to receipt of the remaining escrow balance from the sale of the Cascade Apartments in 2012. Net cash provided by investing activities was $18.8 million for the nine months ended September 30, 2012, primarily attributable to the sale of the Cascades Apartments.

Net cash provided by financing activities was $6.4 million for the nine months ended September 30, 2013, primarily attributable to the proceeds received from the Comstock Investor VII Private Placement of $7.3 million and $23.0 million from notes payable, net of $23.9 million in payments made on notes payable. Net cash used in financing activities was $14.8 million for the nine months ended September 30, 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 and curtailments paid to lenders upon settlement of units at the Penderbrook and Eclipse properties.

Seasonality

Historically, the homebuilding industry experiences seasonal fluctuations in quarterly operating results and capital requirements. We typically experience the highest new home order activity in Spring and Summer, although this activity is also highly dependent on the number of active selling communities, timing of new community openings and other market factors. Since it typically takes four to six months to construct a new home, we deliver more homes in the second half of the year as Spring and Summer home orders convert to home deliveries. Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest in the second and third quarters, and the majority of cash receipts from home deliveries occur during the second half of the year. We expect this seasonal pattern to continue over the long-term, although it may be affected by volatility in the homebuilding industry.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates during the three and nine months ended September 30, 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.


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Off Balance Sheet Arrangements

None.

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