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CHCI > SEC Filings for CHCI > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for COMSTOCK HOLDING COMPANIES, INC.

Form 10-Q for COMSTOCK HOLDING COMPANIES, INC.


15-May-2014

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," " likely," "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, 2013. Our actual results could differ materially from these projected or suggested by the forward-looking statements. The Company undertakes no obligation to update publicly or revise any forward-looking statements in light of new information or future events.

Overview

We are a multi-faceted real estate development and services company. We have substantial experience with building a diverse range of products including multi-family units, 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, Multi-family and Real Estate Services as further discussed in Note 6 of our consolidated financial statements. We are currently focused on the Washington, D.C. metropolitan area, which is the seventh largest metropolitan statistical area in the United States.

We currently have communities under development in multiple counties throughout the Washington, D.C. area market. At March 31, 2014, we either owned or controlled under purchase option agreements approximately 474 building lots.


Table of Contents

The following table summarizes certain information for our owned or controlled communities as of March 31, 2014:

                                                                                                           As of March 31, 2014
                                                                            Estimated                                                                               Average New
                                                                Product      Units at         Units        Backlog       Lots Owned       Lots under Option        Order Revenue
Project                                                 State   Type (2)    Completion       Settled         (3)           Unsold         Agreement Unsold       Per Unit to Date
City Homes at the Hampshires (1)                         DC        SF                38            22             1               15                      -      $             745
Townes at the Hampshires (1)                             DC        TH                73            19             6               48                      -      $             555
Villas at Eastgate (1)                                   VA      Condo               66            54            10                2                      -      $             398
Single Family Homes at Falls Grove (1)                   VA        SF                19            -             -                19                      -      $              -
Townes at Falls Grove (1)                                VA        TH               110            10            11               89                      -      $             300
Townes at Shady Grove Metro (1)                          MD      TH/SF               39            -              9               30                      -      $             639
Momentum | Shady Grove (1)                               MD      Condo              117            -             -               117                      -      $              -
Emerald Farm (4)                                         MD        SF                84            78            -                 6                      -      $             452
Townes at Maxwell Square (1)                             MD        TH                45            -              4               41                      -      $             408
Townes at Hallcrest (1)                                  VA        TH                42            -             -                42                      -      $              -
The Oaks of Highlands(5)                                 VA        SF                24            -             -                24                      -      $              -

Total                                                                               657           183            41              433                      -      $             472

(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 planned for construction activities in 2014.

(5) Development and construction activities planned for 2014.

Results of Operations

Three months ended March 31, 2014 compared to three months ended March 31, 2013

Orders, cancellations and backlog

The following table summarizes certain information related to new orders, settlements and backlog for the three month periods ended March 31, 2014 and 2013

                                              Three Months Ended March 31,
                                                2014                 2013

       Gross new orders                                37                   39
       Cancellations                                    5                    6
       Net new orders                                  32                   33
       Gross new order revenue             $       16,279       $       18,272
       Cancellation revenue                $        2,273       $        3,078
       Net new order revenue               $       14,005       $       15,194
       Average gross new order price       $          440       $          469
       Settlements                                     19                   21
       Settlement revenue - homebuilding   $        7,831       $       11,396
       Average settlement price            $          412       $          543
       Backlog units                                   41                   21
       Backlog revenue                     $       18,517       $        9,219
       Average backlog price               $          452       $          439

Revenue - homebuilding

At March 31, 2014, we had a total of 41 units in backlog to generate future revenue of $18.5 million as compared to $9.2 million from 21 units at March 31, 2013, resulting in 100% increase. The number of homes delivered for the three months ended March 31, 2014 was 19 as compared to 21 homes for the same period in the prior year. Average revenue per home delivered for the three months ended March 31, 2014 was $412 compared to $543 for the three months ended March 31, 2013. Revenue from homebuilding decreased by $3.6 million to $7.8 million for the three months ended March 31, 2014 as compared to $11.4 million for the same period in the prior year as a result of the decrease in the number of homes and the mix of units settled. For the three months ended March 31, 2014, the Company settled 19 homes (10 units at Falls Grove, 8 units at The Hampshires and 1 unit at Eastgate) as compared to 21 units (2 units at Penderbrook, 8 units at Eclipse, 6 units at the Hampshires and 5 units at Eastgate) for the three months ended March 31, 2013. In addition, our homebuilding gross margin percentage for the three months ended March 31, 2014 decreased by 2.7% to 20.1%, as compared to 22.8% for the three months ended March 31, 2013. The decrease noted in revenue and margins was a result of the decrease in the number of homes and the mix of units settled, in addition to adverse weather conditions delaying development and construction activities as compared to prior year.


Table of Contents

Revenue - other

Revenue-other decreased approximately $38 to $123 during the three months ended March 31, 2014, as compared to $161 for the three months ended March 31, 2013. 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.

Cost of sales - homebuilding

Cost of sales - homebuilding for the three months ended March 31, 2014 decreased by $2.5 million to $6.3 million, as compared to $8.8 million for the three months ended March 31, 2013. The unit mix and number of homes settled during the quarter accounted for the decrease in the aggregate cost of sales amount.

Cost of sales - other

Cost of sales - other decreased approximately $128 to $93 for the three months ended March 31, 2014 as compared to $221 for the three months ended March 31, 2013. 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 decrease in cost of sales - other.

Impairment reversal

We evaluate all of our projects to the extent of the existence of any impairment indicators requiring evaluation to determine if recorded carrying amounts were recoverable by evaluating discount rates, sales prices, absorption and our analysis of the best approach to marketing our projects for sale. Due to a change to an individual unit retail sale model from our previous bulk sale disposition strategy for the Eclipse project, we reversed a previously recorded impairment charge of $0.7 million during the three months ended March 31, 2013. There were no similar actions in the current year. See Note 13 to the consolidated financial statements for further discussions and the basis for the impairment reversal.

Sales and marketing

Sales and marketing expenses for the three months ended March 31, 2014 increased by $0.1 million to $0.5 million, as compared to $0.4 million for the three months ended March 31, 2013. The increase in sales and marketing expenses over the same period in the prior year is directly attributable to increases in the number of active developments and marketing efforts.

General and administrative

General and administrative expenses for the three months ended March 31, 2014 increased $0.3 million to $1.9 million, as compared to $1.6 million for the three months ended March 31, 2013. The increase in general and administrative expenses over the three month period is attributable to additional full time employees.

Income taxes

The Company recorded a tax provision of $74 for the three months ended March 31, 2014, based on an effective tax rate of 10%, related to statutory tax rates in the District of Columbia where the Company has no deferred tax benefit to offset the tax liability. No such provision was recorded for the three months ended March 31, 2013.

Liquidity and Capital Resources

We require capital to operate, to make 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 service its debt, invest in new projects, and cover its overhead/working capital through the next 12 months.


Table of Contents

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 12 in the consolidated financial statements for details of our credit facilities and maturities of all of our borrowings.

Cash Flow

Net cash used in operating activities was $2.6 million for the three months ended March 31, 2014. This represents a decrease from the net cash provided by operating activities of $4.1 million for the three months ended March 31, 2013. The change is primarily attributable to the increase in cash out flow for real estate inventories as the Company continues to invest in new projects and positions itself for growth, as well as the impact of adverse weather conditions delaying the development of projects and the related construction of homes for sale.

Net cash used in financing activities was $1.8 million for the three months ended March 31, 2014, primarily attributable to the distributions made to non-controlling interest members including preferred returns. Net cash provided by financing activities was $1.5 million for the three months ended March 31, 2013, primarily attributable to the proceeds from the Comstock VII private placement of $7.0 million offset by $5.4 million net repayment of notes payable.

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 months ended March 31, 2014 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, 2013

Off Balance Sheet Arrangements

None.

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