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
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated 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 consolidated financial statements.
The Company has evaluated subsequent events through the date these consolidated financial statements were issued and has included all necessary adjustments and disclosures.
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, 2018.
Comstock Holding Companies, Inc., incorporated in 2004 as a Delaware corporation, is a multi-faceted real estate development and services company primarily focused in the Washington, D.C. Metropolitan Statistical Area (“MSA”). In 2018, the Company made a strategic decision to transform its operational platform from for sale production homebuilding to asset management, commercial development and complementary real estate related services. Moving forward, the Company will operate through two primary real estate focused platforms – CDS Asset Management, LC (“CAM”) and Comstock Real Estate Services, LC (“CRES”). On April 30, 2019 the Company announced the exit from the Homebuilding business. References in these consolidated financial statements on Form 10-Q to “Comstock,” “Company”, “CAM”, “CRES”, “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 Company’s 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 are in thousands, except per share data, number of units, or as otherwise noted.
For the three months ended March 31, 2019 and 2018, comprehensive income (loss) equaled net income (loss); therefore, a separate statement of comprehensive income (loss) is not included in the accompanying consolidated financial statements.
Recent Developments
On February 12, 2019, the Company held a special meeting of stockholders (the “2019 Special Meeting”), at which its stockholders approved and adopted the Comstock Holding Companies, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”). The Company’s board of directors previously approved the 2019 Plan on December 12, 2018, subject to stockholder approval. At the 2019 Special Meeting, the Company’s stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of Class A common stock from 11,038,071 to 59,779,750 and a corresponding increase to the number of authorized shares of all classes of capital stock from 31,428,571 to 80,000,000 (the “Amendment”). The Amendment became effective upon filing with the Secretary of State of the State of Delaware on February 15, 2019 (the “Certificate of Amendment”). Also on February 15, 2019 the Company filed a Certificate of Amendment of the Certificate of Designation of Series C Non-Convertible Preferred Stock of Comstock Holding Companies, Inc. (the “Series C Certificate of Amendment”) with the Secretary of the State of Delaware. The Series C Certificate of Amendment amended the Certificate of Designation to increase the number of shares of Series C Preferred Stock from 3,000,000 to 4,500,000. Refer to the Company’s 10K Annual Report filing on March 29, 2019, which is incorporated herein.
On April 30, 2019, The Company entered into a Master Transfer Agreement (the “MTA”) with Comstock Development Services, LC (“CDS”), an entity wholly owned by Christopher Clemente, the Chief Executive Officer of CHCI, and FR54, LC (“FR54”), an entity also controlled by Mr. Clemente, that sets forth certain transactions to complete CHCI’s previously announced exit from the homebuilding and land development business in favor of a migration to an asset management model. Refer to Note 22 –
Subsequent Events
for further discussion regarding the transaction.
5
On April 30, 2019, CDS Asset Management, L.C. (“CAM”), an entity wholly owned by CHCI, entered into an amended and restated master asset management agreement (the “2019 AMA”) with CDS, which amends and restates in its entirety the asset management agreemen
t between the parties dated March 30, 2018 with an effective date as of January 1, 2018. Pursuant to the 2019 AMA, CDS will engage CAM to manage and administer CDS’ commercial real estate portfolio (“CRE Portfolio”) and the day to-day operations of CDS and
each property-owning subsidiary of CDS (collectively, the “CDS Entities”). Pursuant to the terms of the 2019 AMA, CAM will provide investment advisory, development and asset management services necessary to build out, stabilize and manage the CRE Portfoli
o. The CRE Portfolio consists primarily of two of the larger transit-oriented, mixed-use developments located at metro stops on Washington D.C. Metro’s Silver Line (Reston Station and Loudoun Station), which are owned by entities of varying ownership inter
ests but all of which are ultimately controlled by Mr. Clemente.
Refer to Note
2
2
– Subsequent Events for further discussion regarding the 2019 AMA.
On April 30, 2019, CAM entered into a Business Management Agreement (the “Management Agreement”) with Comstock Investors X, L.C. (“Investors X”) whereby CAM will provide Investors X with asset and professional services related to the wind down of Investors X’s homebuilding operations and the continuation of services related to Investors X’s existing land development activities. The aggregate fee payable to CAM from Investors X under the Management Agreement is $937,500, payable in fifteen quarterly installments of $62,500 each. Refer to Note 22 – Subsequent Events for further discussion regarding the Management Agreement.
Use of Estimates
Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of these consolidated 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 judgments on an ongoing basis. Actual results may differ from those estimates under different assumptions or conditions. Material estimates are utilized in the valuation of real estate inventories, valuation of deferred tax assets, analysis of goodwill impairment, valuation of equity-based compensation, valuation of preferred stock issuances, capitalization of costs, consolidation of variable interest entities, fair value of debt instruments and warranty reserves.
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) 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 (“ROU”) asset representing its right to use the underlying asset for the lease term. The FASB subsequently issued ASU 2018-10 and ASU 2018-11 in July 2018, which provide clarifications and improvements to ASU 2016-02. ASU 2018-11 also provides the optional transition method which will allow companies to apply the new lease standard at the adoption date instead of at the earliest comparative period presented. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years. The Company adopted this standard using the modified retrospective method effective January 1, 2019.
As permitted by the guidance, the Company elected to retain the original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date and did not reassess contracts entered into prior to the adoption date for the existence of a lease. The Company also did not recognize ROU assets and lease liabilities for short-term leases, which are leases in existence as of the adoption date with an original term of twelve months or less. As a result of the adoption of the standard, the Company recognized ROU assets and liabilities of $170 thousand as of the adoption date on its condensed consolidated balance sheet. The assets and liabilities recognized upon application of the transition provisions were primarily associated with our existing office leases.
Recently Issued Accounting Standards
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which removes, adds and modifies certain disclosure requirements for fair value measurements in Topic 820. ASU 2018-13 removes the following disclosure requirements: (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and (ii) the entity’s valuation processes for Level 3 fair value measurements. ASU 2018-13 adds the following disclosure requirements: (i) provide information about the measurement uncertainty of Level 3 fair value measurements as of the reporting date rather than a point in the future, (ii) disclose changes in unrealized gains and losses related to Level 3 measurements for the period included in other comprehensive income, and (iii) disclose for Level 3 measurements the range and weighted average of the significant unobservable inputs and the way it is calculated. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. We do not expect the adoption of this pronouncement to have a material impact on our consolidated financial statements.
6
We assessed other accounting pronouncements issued or effective during the three
months
ended
March
3
1
, 201
9
and deemed they were not applicable to u
s and are not anticipated to have a material effect on our consolidated financial statements.
Other standards previously issued and adopted by the Company have been disclosed in previous filings.
2. TRADE RECEIVABLES & TRADE RECEIVABLES – RELATED PARTIES
Trade receivables include amounts due from real estate services, asset management, commercial development, home sales transactions and amounts due from related parties with whom we have service arrangements. There is no allowance for doubtful accounts recorded.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Trade
|
|
$
|
793
|
|
|
$
|
804
|
|
Due from settlement attorneys
|
|
|
606
|
|
|
|
441
|
|
Other
|
|
|
35
|
|
|
|
84
|
|
|
|
$
|
1,434
|
|
|
$
|
1,329
|
|
As of March 31, 2019 and December 31, 2018, the Company had $1.3 million and $3.0 million, respectively, of receivables from related parties, primarily related to the AMA.
3. REAL ESTATE INVENTORIES
After impairments and write-offs, real estate held for development and sale consists of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Land and land development costs
|
|
$
|
7,919
|
|
|
$
|
9,741
|
|
Cost of construction (including capitalized interest and real estate
taxes)
|
|
|
9,679
|
|
|
|
10,512
|
|
|
|
$
|
17,598
|
|
|
$
|
20,253
|
|
As a result of our impairment analysis, for the three months ended March 31, 2019, the Company did not expense any feasibility, site securing, predevelopment, design, carry costs and related costs for its communities in the Washington, D.C. metropolitan area. There were $0.6 million of impairment charges recorded during the three months ended March 31, 2018 due to unsuccessful negotiations and market conditions.
4. GOODWILL & INTANGIBLES
On July 17, 2017, Comstock Environmental, an entity wholly owned by CDS Capital Management, L.C., a subsidiary of Comstock, purchased all of the business assets of Monridge Environmental, LLC for $2.3 million. Comstock Environmental has its principal office located in Conshohocken, Pennsylvania, and operates in Maryland, Pennsylvania, New Jersey, and Delaware. Comstock Environmental operates as an environmental services company, providing consulting, remediation, and other environmental services.
Goodwill represents the excess of the acquisition purchase price over the fair value of assets acquired and liabilities assumed, and it is not deductible for income tax purposes. As of the acquisition date, goodwill consisted primarily of synergies resulting from the combination, expected expanded opportunities for growth and production, and savings in corporate overhead costs. As of March 31, 2019 and December 31, 2018, the balance of goodwill was $1.7 million.
7
Intangible assets include customer relationships which
have
an amortization period of four years.
During the three months ended March 31, 2019 and 2018, $
17
thousand of intangible asset amortization
was recorded in
‘
General and
a
dministrative
’
expense on the Consolidation Statement
s
of Operations.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Intangibles
|
|
|
268
|
|
|
|
268
|
|
Less: accumulated amortization
|
|
|
(115
|
)
|
|
|
(98
|
)
|
|
|
$
|
153
|
|
|
$
|
170
|
|
As of March 31, 2019, the future estimated amortization expense related to these intangible assets was:
|
|
Amortization
|
|
|
|
Expense
|
|
2019
|
|
$
|
50
|
|
2020
|
|
|
67
|
|
2021
|
|
|
36
|
|
Total
|
|
$
|
153
|
|
5. LEASES
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases, later codified as Accounting Standards Codification ("ASC") 842 ("ASC 842"), using the modified retrospective method. For periods presented prior to the adoption date, the Company continues to follow its previous policy under ASC 840, Leases.
The determination of whether an arrangement contains a lease and the classification of a lease, if applicable, is made at lease commencement, at which time the Company also measures and recognizes an ROU asset, representing the Company’s right to use the underlying asset, and a lease liability, representing the Company’s obligation to make lease payments under the terms of the arrangement. For the purposes of recognizing ROU assets and lease liabilities associated with the Company’s leases, the Company has elected the practical expedient to not recognize a ROU asset or lease liability for short-term leases, which are leases with a term of twelve months or less. The lease term is defined as the noncancelable portion of the lease term plus any periods covered by an option to extend the lease if it is reasonably certain that the option will be exercised.
ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The rates implicit within the Company's leases are generally not determinable, therefore, the Company's incremental borrowing rate is used to determine the present value of lease payments. The determination of the Company’s incremental borrowing rate requires judgment. The incremental borrowing rate is determined at lease commencement, or as of January 1, 2019 for operating leases in existence upon adoption of ASC 842.
The Company has operating leases for its office facilities as well as for office equipment. The Company's leases have remaining terms of less than one year to 3 years. The leases can contain various renewal and termination options. The period which is subject to an option to extend the lease is included in the lease term if it is reasonably certain that the option will be exercised. The period which is subject to an option to terminate the lease is included if it is reasonably certain that the option will not be exercised. Lease costs related to the Company's operating leases are generally recognized as a single ratable lease cost over the lease term.
Maturities of lease liabilities as of March 31, 2019 are as follows:
|
|
Operating
Leases
|
|
2019 (9 months ended December 31)
|
|
$
|
49
|
|
2020
|
|
|
59
|
|
2021
|
|
|
54
|
|
2022
|
|
|
9
|
|
Total lease payments
|
|
|
171
|
|
Less: imputed interest
|
|
|
15
|
|
Present Value of lease liabilities
|
|
$
|
156
|
|
8
As of March 31, 2019, operating lease payments include $108 thousand related to options to extend lease terms that are reasonably certain of being exercised. The Company does not have any lease liabilities which have not yet commenced as of March 31, 2019.
6. OTHER ASSETS, NET
Other assets, net consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Bonds and escrow deposits
|
|
$
|
1,108
|
|
|
$
|
1,100
|
|
Prepaid insurance
|
|
|
82
|
|
|
|
60
|
|
Other
|
|
|
300
|
|
|
|
304
|
|
|
|
|
1,490
|
|
|
|
1,464
|
|
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Trade and accrued payables
|
|
$
|
3,729
|
|
|
$
|
4,727
|
|
Accrued wages and commissions
|
|
|
477
|
|
|
|
1,396
|
|
Customer deposits
|
|
|
2,357
|
|
|
|
1,189
|
|
Warranty
|
|
|
186
|
|
|
|
195
|
|
Other
|
|
|
54
|
|
|
|
107
|
|
|
|
$
|
6,803
|
|
|
$
|
7,614
|
|
8. CONTRACT LIABILITIES
Progress payment balances in excess of revenue recognized, as well as advance payments received from customers, are classified as deferred contract liabilities on the consolidated balance sheet in the financial statement line item titled “Deferred revenue.” Homebuilding purchase deposits are classified as deferred contract liabilities on the consolidated balance sheet in the financial statement line item titled “Accounts payable and accrued liabilities.”
Contract liabilities consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Contract Liabilities: Customer Deposits and Deferred Revenue
|
|
|
|
|
|
|
|
|
Homebuilding - Customer deposits
|
|
$
|
2,357
|
|
|
$
|
1,189
|
|
Asset Management - Deferred revenue
|
|
|
1,250
|
|
|
|
1,875
|
|
Total Contract Liabilities
|
|
$
|
3,607
|
|
|
$
|
3,064
|
|
Asset Management – Deferred revenue relate to the AMA executed on March 30, 2018 and effective January 2, 2018. See Note 18 –
Related Party Transactions
for details regarding this transaction.
The Company’s other contract liabilities, that consist of deposits received from customers (“Customer deposits”) on homes not settled, were $2.4 million and $1.2 million as of March 31, 2019 and December 31, 2018, respectively. During the three months ended March 31, 2019, the Company recognized in revenue approximately $414 thousand of the customer deposits held as of December 31, 2018.
Customer deposits are also included in Note 7 –
Accounts Payable and Accrued Liabilities
.
9
9. REVENUE
The Company’s revenues consist primarily of 1) buildout of the remaining projects under the homebuilding platform, 2) recurring fees earned under the AMA, 3) property management, and 4) real estate management and consulting services. All of the Company’s revenue streams are U.S. based and substantially all are accounted for as short-term contracts. As such, the performance obligations required to complete contracts have an expected duration of less than one year. As a result, the Company does not disclose the value of unsatisfied performance obligations for contracts in accordance with the optional exemptions related to the disclosure of transaction price allocation under ASC 606. Additionally, incremental costs of obtaining a contract are recognized as an expense when incurred because the amortization period of the asset would have been recognized in one year or less.
The following table presents the Company’s sales from contracts with customers disaggregated by categories which best represents how the nature, amount and timing and uncertainty of sales are affected by economic factors.
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue by customer
|
|
|
|
|
|
|
|
|
Individual customers
|
|
$
|
6,769
|
|
|
$
|
5,561
|
|
Related party
|
|
|
3,595
|
|
|
|
2,791
|
|
Commercial
|
|
|
994
|
|
|
|
447
|
|
Total Revenue by customer
|
|
$
|
11,358
|
|
|
$
|
8,799
|
|
|
|
|
|
|
|
|
|
|
Revenue by contract type
|
|
|
|
|
|
|
|
|
Fixed-price
|
|
$
|
7,202
|
|
|
$
|
5,561
|
|
Cost-plus
|
|
|
3,485
|
|
|
|
2,791
|
|
Time and Material
|
|
|
671
|
|
|
|
447
|
|
Total Revenue by contract type
|
|
$
|
11,358
|
|
|
$
|
8,799
|
|
Revenue and related profits or losses from homebuilding contracts: the sale of residential properties and units, finished lots and land sales is recognized on the settlement date at the contract sales price, when control is transferred to our customers. These contracts meet the criteria for recognizing revenue at a point in time. As such, these revenues are disaggregated in ‘Individual customers’ and ‘Fixed-price’ in the tables above.
Under the recently executed AMA and most of the Company’s real estate services contracts, performance obligations are satisfied over time. For performance obligations satisfied over time, the objective is to measure progress in a manner which depicts the performance of transferring control to the customer. As such, the company recognizes revenue over time using the “right-to-invoice” cost-to-cost revenue recognition model, which includes cost-plus and fixed-prices contracts, as this depicts when control of the promised goods and/or services are transferred to the customer. Sales are recognized as the ratio of actual costs of work performed to the estimated costs at completion of the performance obligation (cost-to-cost). As such, these revenues are disaggregated in ‘Related party’ and ‘Commercial’ customers, and ‘Cost-plus’ and ‘Fixed-price’ in the tables above.
Other revenue earned from management, consulting and administrative support services provided, which may or may not be covered by a formal contract, are generally time and material based. Revenue from these contracts is recognized as the services are provided. As such, these revenues are disaggregated in ‘Commercial’ and ‘Time and Material’ in the tables above.
10. 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.
10
The following table is a summary of warranty reserve activity which is included in ‘Accounts payable and accrued liabilities’ within the c
onsolidated balance sheets:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Balance at beginning of period
|
|
$
|
195
|
|
|
$
|
258
|
|
Additions
|
|
|
18
|
|
|
|
16
|
|
Releases and/or charges incurred
|
|
|
(27
|
)
|
|
|
(47
|
)
|
Balance at end of period
|
|
$
|
186
|
|
|
$
|
227
|
|
11. 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.
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,
|
|
|
|
2019
|
|
|
2018
|
|
Interest incurred and capitalized
|
|
$
|
392
|
|
|
$
|
896
|
|
Real estate taxes incurred and capitalized
|
|
|
14
|
|
|
|
66
|
|
Total interest and real estate taxes incurred and capitalized
|
|
$
|
406
|
|
|
$
|
962
|
|
|
|
|
|
|
|
|
|
|
Interest expensed as a component of cost of sales
|
|
$
|
519
|
|
|
$
|
518
|
|
Real estate taxes expensed as a component of cost of sales
|
|
|
41
|
|
|
|
48
|
|
Interest and real estate taxes expensed as a component of
cost of sales
|
|
$
|
560
|
|
|
$
|
566
|
|
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. 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.
12. DEBT
Notes payable consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Construction revolvers
|
|
$
|
1,883
|
|
|
$
|
2,220
|
|
Development and acquisition notes
|
|
|
7,293
|
|
|
|
10,290
|
|
Line of credit
|
|
|
-
|
|
|
|
13
|
|
Other
|
|
|
857
|
|
|
|
909
|
|
Total secured notes
|
|
|
10,033
|
|
|
|
13,432
|
|
Unsecured financing, net of unamortized deferred financing
charges of $0 and $0, respectively
|
|
|
595
|
|
|
|
595
|
|
Notes payable- due to affiliates, unsecured, net of $0.8 million
and $0.8 million discount and unamortized deferred
financing charges, respectively
|
|
|
4,935
|
|
|
|
4,903
|
|
Total notes payable
|
|
$
|
15,563
|
|
|
$
|
18,930
|
|
11
As of March 31, 2019, net maturities and/or curtailment obligations of all borrowings are as follows:
2019
|
|
$
|
4,935
|
|
2020
|
|
|
4,802
|
|
2021
|
|
|
4,375
|
|
2022
|
|
|
1,419
|
|
2023 and thereafter
|
|
|
32
|
|
Total
|
|
$
|
15,563
|
|
As of March 31, 2019, the Company had no credit facilities or project related loans scheduled to mature during the remainder of 2019.
Construction and development debt – secured
The Company enters into secured acquisition and development loan agreements 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.
The Company had $1.9 million and $2.2 million of outstanding secured construction borrowings as of March 31, 2019 and December 31, 2018, 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, 2019 and December 31, 2018, the weighted average interest rate on the Company’s outstanding construction revolving facilities was 5.7% per annum. The construction credit facilities have maturity dates ranging from March 15, 2020 to July 31, 2020, including extensions subject to the Company meeting certain conditions.
As of March 31, 2019, and December 31, 2018, the Company had approximately $7.3 million and $10.3 million, respectively, of aggregate acquisition and development loans outstanding. These loans have maturity dates ranging from March 15, 2020 to July 25, 2021, 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 4.25% to 5.50% per annum. As of March 31, 2019 and December 31, 2018, the weighted average interest rate was 5.9% and 6.6% per annum, respectively.
Line of credit – secured
During 2018, the Company opened a secured line of credit with a maximum capacity of $0.2 million, which was paid in full during the three months ended March 31, 2019. Interest charged on this line of credit was based on the prime rate plus 2.50%. As of December 31, 2018, there was $13 thousand of principal and interest outstanding on this line of credit, and the interest rate was 6.75%.
Other – secured
As of March 31, 2019 and December 31, 2018, the Company had one secured loan related to Comstock Environmental. The loan was used to finance the acquisition of Comstock Environmental, and carries a fixed interest rate of 6.5%, with a maturity date of October 17, 2022. At March 31, 2019 and December 31, 2018, this financing had an outstanding balance of $824 thousand and $874 thousand, respectively. This financing is secured by the assets of Comstock Environmental and is guaranteed by our Chief Executive Officer.
Unsecured financing
As of March 31, 2019 and December 31, 2018, the Company had one unsecured seller-financed promissory note with an outstanding balance of $595 thousand. This financing carries an annual interest rate of LIBOR plus 3% and has a maturity date of July 17, 2022. At March 31, 2019 and December 31, 2018, the interest rate was 5.7% and 6.0%, respectively.
12
Notes payable to affiliate – unsecured
Comstock Growth Fund
On October 17, 2014, Comstock Growth Fund, L.C. (“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 Company’s 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. On December 18, 2014, the loan agreement was amended and restated to provide for a maximum capacity of $25 million. On May 23, 2018, Comstock Holding Companies, Inc. (“Comstock” , “CHCI” or the “Company”) entered into a Membership Interest Exchange and Subscription Agreement (the “Membership Exchange Agreement”), together with a revised promissory note agreement, in which a note (“CGF Note”) with an outstanding principal and accrued interest balance of $7.7 million was exchanged for 1,482,300 shares of the Company’s Series C Non-Convertible Preferred Stock, par value $0.01 per share and a stated liquidation value of $5.00 per share (the “Series C Preferred Stock”), issued by the Company to Comstock Development Services, LLC (“CDS”), a Company wholly owned by our Chief Executive Officer. The Company exchanged the preferred equity for 91.5% of CDS membership interest in the Comstock Growth Fund promissory note. Concurrently, the face amount of the CGF Note was reduced to $5.7 million as of the Effective Date. The loan bears interest at a fixed rate of 10% per annum. Interest payments will be made monthly in arrears. The Company is the administrative manager of CGF but does not own any membership interests. The Company had approximately $4.9 million of outstanding borrowings and accrued interest under the CGF loan, net of discounts, as of March 31, 2019 and December 31, 2018. As of March 31, 2019, and December 31, 2018, the interest rate was 10.0% per annum. The maturity date for the CGF loan was April 16, 2019. Subsequent to March 31, 2019, the Company secured an extension on the CGF loan, providing for a new maturity date of April 16, 2020. See Note 22 –
Subsequent Events
for further discussion on the extension.
For the three months ended March 31, 2019 and 2018, the Company made interest payments of $0.2 million and $0.1 million, respectively.
During the three months ended March 31, 2019 and 2018, the Company did not make principal payments to CGF.
13. COMMITMENTS AND CONTINGENCIES
Litigation
Currently, we are not subject to any material legal proceedings. From time to time, 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.
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, 2019, and 2018, the Company had $1.1 million in outstanding letters of credit. At March 31, 2019, and 2018, the Company had $7.7 million and $4.5 million in outstanding performance bonds, respectively. No amounts have been drawn against these 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, 2019, and December 31, 2018, we had approximately $1.0 million in these escrow accounts, which are included in ‘Restricted cash’ in the accompanying consolidated balance sheets.
13
1
4
. FAIR VALUE DISCLOSURES
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable 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 fixed and 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,
|
|
|
|
2019
|
|
|
2018
|
|
Carrying amount
|
|
$
|
15,563
|
|
|
$
|
18,930
|
|
Fair value
|
|
$
|
15,376
|
|
|
$
|
18,608
|
|
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.
In connection with the CGF I & II conversions discussed in Note 12 –
Debt
and Note 18 –
Related Party Transactions
, we issued 2,220,690 shares of Series C Non-Convertible Preferred Stock with a liquidation preference 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 Company recorded these shares based on the fair value calculation on the effective date of the agreement. The Company used various assumptions and inputs such as current market condition and financial position in calculating the fair value of the Series C Preferred Stock by back solving from the Company’s equity value using the option pricing and the probability-weighted expected return models, adjusted for marketability of the Series C Preferred Stock.
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.
As a result of our impairment analysis, for the three months ended March 31, 2019, the Company did not expense any feasibility, site securing, predevelopment, design, carry costs and related costs for its communities in the Washington, D.C. metropolitan area. There were $0.6 million of impairment charges recorded during the three months ended March 31, 2018 due to unsuccessful negotiations and market conditions.
15. RESTRICTED STOCK, STOCK OPTIONS AND OTHER STOCK PLANS
During the three months ended March 31, 2019, the Company issued 94,431 stock options and 57,788 restricted stock awards to employees. No stock awards were issued during the three months ended March 31, 2018.
Stock-based compensation expense associated with restricted stock and stock options is recognized based on the grant date fair value of the award over its vesting period. The following table reflects the consolidated balance sheets and statements of operations line items for stock-based compensation for the periods presented:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Assets - Real Estate Inventories
|
|
$
|
3
|
|
|
$
|
14
|
|
Cost of sales - Real Estate Services
|
|
|
11
|
|
|
|
86
|
|
Expense - General and administrative
|
|
|
73
|
|
|
|
-
|
|
|
|
|
87
|
|
|
|
100
|
|
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.
14
As of
March 31, 2019
, the weighted-average remaining contractual term of unexercised stock options was 8 years. As of
March 31, 2019
, and
December 31, 2018
, there was $0.5 million and $0.
3
million, respectively, of
unrecognized compensation cost related to stock grants.
The Company intends to issue new shares of its common stock upon vesting of restricted stock grants or the exercise of stock options.
16. EARNINGS PER SHARE
The weighted average shares and share equivalents used to calculate basic and diluted loss per share for the three months ended March 31, 2019 and 2018 are presented in the accompanying consolidated statements of operations. Restricted stock awards, stock options and warrants for the three months ended March 31, 2019 and 2018 are included in the diluted loss per share calculation using the treasury stock method and average market prices during the periods, unless their inclusion would be anti-dilutive.
The following shares have been excluded from the dilutive share computation for the three months ended March 31, 2019 and 2018 as their inclusion would be anti-dilutive.
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Restricted stock awards
|
|
|
—
|
|
|
|
46
|
|
Stock options
|
|
|
319
|
|
|
|
850
|
|
Warrants
|
|
|
620
|
|
|
|
994
|
|
|
|
|
939
|
|
|
|
1,890
|
|
17. CONSOLIDATION OF VARIABLE INTEREST ENTITIES
GAAP requires a VIE to be consolidated by the company that is the primary beneficiary. The primary beneficiary of a VIE is the entity that has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. Entities determined to be VIEs, for which we are not the primary beneficiary, are accounted for under the equity method. Comstock’s variable interests in VIEs may be in the form of (1) equity ownership, (2) contracts to purchase assets and/or (3) loans provided to and or guaranteed for a VIE. We examine specific criteria and use judgment when determining if Comstock is the primary beneficiary of a VIE. Factors considered in determining whether we are the primary beneficiary include risk and reward sharing, experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions and contracts to purchase assets from VIEs.
Consolidated Real Estate Inventories
Included within the Company’s real estate inventories at March 31, 2019 and December 31, 2018 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 the Company’s majority voting rights and complete operational control of these entities,
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 Company’s Class A common stock to the non-affiliated accredited investors, having an aggregate fair value of $131 thousand. Comstock VIII Class B Members included unrelated third-party accredited investors along with members of the Company’s board of directors and the Company’s 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 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.
15
In August 2016, Comstock Investors X, L.C. (“Comstock X”) entered into a subscription agreement wi
th 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 int
erests 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 150,000 warrants for the purchase of
shares of the Company’s 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 repu
rchase 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 a
ccount plus accrued priority return. In October 2017, the Operating Agreement for Comstock X was amended to increase the maximum capital raise to $19.5 million. Additionally, in October 2017, Comstock X received proceeds of $5.0 million under the amended O
perating Agreement to be used for the planned construction of the Company’s Totten Mews, Town
e
s at 1333, Richmond Station, and Mar
r
wood East projects. As part of this additional contribution, 50,000 warrants for the purchase of the Company’s Class A common
stock, having an aggregate fair value of $81
were issued
. 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 Comp
any 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 consolida
tes this entity.
No distributions were made during the three months ended March 31, 2019 and 2018.
At March 31, 2019 and December 31, 2018, the distributions and contributions for the VIEs discussed above are included within the ‘Non-controlling interest’ classification in the consolidated balance sheets.
At March 31, 2019 and December 31, 2018, total assets of these VIEs were approximately $16.6 million and $19.3 million, respectively, and total liabilities were approximately $11.6 million and $12.6 million, respectively. The classification of these assets is primarily within ‘Real estate inventories’ and the classification of liabilities is primarily within ‘Accounts payable and accrued liabilities’ and ‘Notes payable – secured by real estate inventories’ in the accompanying consolidated balance sheets.
18
. RELATED PARTY TRANSACTIONS
Lease for Corporate Headquarters
The Company has a lease for its corporate headquarters from an affiliate wholly-owned by our CEO. Future minimum lease payments under this lease, which expires on September 30, 2019, is $0.4 million.
For each of the three months ended March 31, 2019 and 2018, total rental payments made were $138 thousand and $53 thousand, respectively. Rent expense for the three months ended March 31, 2019 and 2018 was $138 thousand and $53 thousand, respectively.
Asset Management Agreement
On March 30, 2018, CDS Asset Management, L.C. (“CAM”), an entity wholly owned by the Company, entered into a master asset management agreement (the “AMA”) with Comstock Development Services LC (“CDS”), an entity wholly owned by Christopher Clemente, the Chief Executive Officer of the Company. The effective date of this Agreement is January 2, 2018. Pursuant to the AMA, CDS has engaged CAM to manage and administer the CDS’ commercial real estate portfolio and the day to-day operations of CDS and each property-owning subsidiary of CDS. Pursuant to the terms of the AMA, CAM will provide investment advisory, development and asset management services necessary to build out, stabilize and manage certain assets.
Pursuant to the AMA, CDS will pay CAM an annual cost-plus fee (the “Annual Fee”) in an aggregate amount equal to the sum of (i) the employment expenses of personnel dedicated to providing services to the Comstock Real Estate Portfolio pursuant to the AMA, (ii) the costs and expenses of the Company related to maintaining the listing of its shares on a securities exchange and complying with regulatory and reporting obligations as a public company, and (iii) a fixed annual payment of $1,000,000. During the three months ended March 31, 2019, the Company recorded revenue of $3.6 million which is included in ‘Revenue-asset management’ in the consolidated statement of operations).
On April 30, 2019 the Company entered into an amended and restated master asset management agreement. Refer to Note 22 – Subsequent Events for further information on the transaction.
16
Private Placements and Promissory Notes
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 $4.5 million issued to the Company by Stonehenge was cancelled in its entirety and exchanged for 772,210 shares of the Company’s 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 $3.9 million. The holders of Series B Preferred Stock earned dividends at a rate of 8.75% per annum accruing from the effective date of the Note Exchange and Subscription Agreement.
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”). Also 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. On December 29, 2017, the CGF II loan was extended one year to December 31, 2018. On May 23, 2018, Comstock Holding Companies, Inc. (“Comstock” , “CHCI” or the “Company”) entered into a Note Exchange and Subscription Agreement (the “Note Exchange Agreement”) in which a note (“CGF2 Note”) with an outstanding principal and accrued interest balance of $3.7 million was exchanged for 738,390 shares of the Company’s Series C Non-Convertible Preferred Stock, par value $0.01 per share and a stated liquidation value of $5.00 per share (the “Series C Preferred Stock”), issued by the Company to Comstock Growth Fund II, L.C. (“CGF2”), a Company wholly owned by our Chief Executive Officer. The CGF2 Note was cancelled in its entirety effective as of the Effective Date. As a result of the conversion of CGF & CGF2 notes, the Company recognized a gain of $3.7 million, which was recorded in ‘Additional paid-in capital’ in the consolidated balance sheet and an income tax benefit of $0.5 million, which was recorded in the consolidated statement of operations for the year ended 2018.
See Note 17 for a summary of the Comstock VIII Private Placement which involved certain of our officers and directors and Note 12 to the consolidated financial statements for further description of the CGF Private Placement.
Services Agreement
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 the Chief Executive Officer, to provide services related to real estate development and improvements, legal, accounting, marketing, information technology and additional support services. For the years ended December 31, 2018, the Company billed Comstock Asset Management, L.C. $0.12 million for services and out-of-pocket expenses incurred. Revenues from this arrangement are included within ‘Revenue – asset management’ within the accompanying consolidated statements of operations. As of December 31, 2018 the Company was not owed under this contract.
19. UNCONSOLIDATED JOINT VENTURE
The Company accounts for its 50% interest in its title insurance joint venture using the equity method of accounting and 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 ‘Revenue – real estate services’ in the accompanying consolidated statements of operations for the periods presented.
Our share of the earnings for the three months ended March 31, 2019 and 2018 are $57 thousand and $14 thousand, respectively. During the three months ended March 31, 2019 and 2018, the Company collected total distributions of $58 thousand and $10 thousand, respectively, as a return on investment..
17
Summarized financial information for the unconsolidated
joint venture is as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Statement of Operations:
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
147
|
|
|
$
|
58
|
|
Total expenses
|
|
|
33
|
|
|
|
30
|
|
Net income
|
|
$
|
114
|
|
|
$
|
28
|
|
Comstock Holding Companies, Inc. share of net income
|
|
$
|
57
|
|
|
$
|
14
|
|
20. INCOME TAXES
For the three months ended March 31, 2019, the Company recognized income tax expense of $3 thousand and the effective tax rate is (0.85)
%. The effective tax rate is primarily attributable to the Company’s federal and state Net Operating Losses (“NOL”s).
The Company currently has approximately $147 million in federal and state NOLs. If unused, these NOLs will begin expiring in 2027. Under Code Section 382 (“Section 382”) rules, if a change of ownership is triggered, the Company’s NOL assets and possibly certain other deferred tax assets may be impaired.
The Company has not recorded any accruals related to uncertain tax positions as of March 31, 2019 and 2018. We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. The 2015 through 2018 tax years remain subject to examination by federal and most state tax authorities
.
21. SEGMENT DISCLOSURES
During the three months ended March 31, 2019 and 2018 we operated our business through our three segments: Homebuilding, Asset Management, and Real Estate Services. We are focused on the Washington, D.C. MSA.
In our Asset Management segment, we focus on providing management services to a wide range of real estate assets and businesses that include a variety of commercial real estate uses, including apartments, hotels, office buildings, commercial garages, leased lands, retail stores, mixed-use developments, and urban transit-oriented developments. We have significant experience with construction, development, property and asset management services. The properties and businesses we currently manage are located primarily along the Washington, D.C. Metro Silver Line in Fairfax and Loudoun Counties, but also include projects in Montgomery County, Maryland and the Town of Herndon, Virginia.
In our Real Estate Services segment, our experienced real estate services-based management team provides a wide range of real estate services in the areas of strategic corporate planning, capital markets, brokerage services, and environmental and design based services. Our environmental services group provides consulting, environmental studies, remediation services and provide site specific solutions for any project that may have an environmental impact, from environmental due diligence to site-specific assessments and remediation. This business line not only allows us to generate positive fee income from our highly qualified personnel but also serves as a potential catalyst for joint venture and acquisition opportunities.
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. On April 30, 2019 the Company completed the previously announced exit from homebuilding and land development. See Note 22 –
Subsequent Events
for details regarding the transaction.
18
The Asset Management and Homebuilding segments operate solely within the Company’s Washington, D.C.
MSA
reportable geographic area. The Real Estate Services segment operates in the Washington, D.C
. MSA
, New Jersey, and Pennsylvania geographic area. The fol
lowing table includes the Company’s three reportable segments of
Homebuilding,
Asset Management,
and
Real Estate Services for the
three months ended March 31, 2019
and
2018
.
|
|
|
|
|
|
Asset
|
|
|
Real Estate
|
|
|
|
|
|
|
|
Homebuilding
|
|
|
Management
|
|
|
Services
|
|
|
Total
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
6,978
|
|
|
$
|
3,652
|
|
|
$
|
728
|
|
|
$
|
11,358
|
|
Gross profit
|
|
|
256
|
|
|
|
335
|
|
|
|
234
|
|
|
|
825
|
|
Net income
|
|
|
126
|
|
|
|
230
|
|
|
|
13
|
|
|
|
369
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
7
|
|
|
|
38
|
|
|
|
45
|
|
Interest expense
|
|
|
12
|
|
|
|
—
|
|
|
|
22
|
|
|
|
34
|
|
Total assets
|
|
|
26,042
|
|
|
|
1,808
|
|
|
|
3,071
|
|
|
|
30,921
|
|
Three Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
5,561
|
|
|
$
|
2,791
|
|
|
$
|
447
|
|
|
$
|
8,799
|
|
Gross profit
|
|
|
66
|
|
|
|
250
|
|
|
|
270
|
|
|
|
586
|
|
Net (loss) income
|
|
|
(681
|
)
|
|
|
250
|
|
|
|
(197
|
)
|
|
|
(628
|
)
|
Depreciation and amortization
|
|
|
—
|
|
|
|
—
|
|
|
|
37
|
|
|
|
37
|
|
Interest expense
|
|
|
61
|
|
|
|
—
|
|
|
|
24
|
|
|
|
85
|
|
Total assets
|
|
|
46,409
|
|
|
|
3,976
|
|
|
|
2,913
|
|
|
|
53,298
|
|
The Company allocates sales, marketing and general and administrative expenses to the individual segments based upon specifically allocable costs.
22. SUBSEQUENT EVENTS
Master Transfer Agreement
On April 30, 2019, the Company entered into the MTA with CDS, an entity wholly owned by Christopher Clemente, the Chief Executive Officer of CHCI, and FR54, an entity also controlled by Mr. Clemente, that sets forth certain transactions to complete the Company’s previously announced exit from the homebuilding and land development business in favor of a migration to an asset management model.
Amended and Restated Asset Management Agreement
On April 30, 2019, CDS Asset Management, L.C. (“CAM”), an entity wholly owned by CHCI, entered into an amended and restated master asset management agreement (the “2019 AMA”) with CDS, which amends and restates in its entirety the asset management agreement between the parties dated March 30, 2018 with an effective date as of January 1, 2018. Pursuant to the 2019 AMA, CDS will engage CAM to manage and administer CDS’ commercial real estate portfolio (“CRE Portfolio”) and the day to-day operations of CDS and each property-owning subsidiary of CDS (collectively, the “CDS Entities”).
Pursuant to the terms of the 2019 AMA, CAM will provide investment advisory, development and asset management services necessary to build out, stabilize and manage the CRE Portfolio. The CRE Portfolio consists primarily of two of the larger transit-oriented, mixed-use developments located at metro stops on Washington D.C. Metro’s Silver Line (Reston Station and Loudoun Station), which are owned by entities of varying ownership interests but all of which are ultimately controlled by Mr. Clemente. Pursuant to the modified fee structure set forth in the 2019 AMA, CDS will pay CAM an annual fee equal to the greater of either (i) an aggregate amount equal to the sum of (a) an asset management fee equal to 2.5% of the CRE Portfolio revenues; (b) a construction management fee equal to 4% of all costs associated with CRE Portfolio projects in development; (c) a property management fee equal to 1% of the CRE Portfolio revenues, (d) an acquisition fee equal to up to 0.5% of the purchase price of an acquired asset; and (f) a disposition fee equal to 0.5% of the sales price of an asset on disposition (collectively the “Market Rate Fee”); or (ii) an aggregate amount equal to the sum of (x) the employment expenses of personnel dedicated to providing services to the CRE Portfolio pursuant to the 2019 AMA, (y) the costs and expenses of CHCI related to maintaining the listing of its shares on a securities exchange and complying with regulatory and reporting obligations of a public company, and (z) a fixed annual payment of $1,000,000 (collectively the “Cost Plus Fee”).
In addition to the annual payment of either the Market Rate Fee or the Cost Plus Fee; CAM is also entitled on an annual basis to the following supplemental AMA fees; (i) an incentive fee equal to 10% of the free cash flow of each of the real estate assets
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comprising the CRE Portfolio after calculating a compounding preferred return of 8% on CDS invested capital (the “Incentive Fee”); (ii)
an investment origination fee equal to 1% of raised capital, (iii) a leasing fee equal to $1.00/sf for new leases and $.50/sf for renewals; and (iv) mutually agreeable loan origination fees related to the CRE Portfolio.
The 2019 AMA will terminate on December 31, 2027 (“Initial Term”), an extension from the original termination date of December 31, 2022, and will automatically renew for successive additional one-year terms (each an “Extension Term”) unless CDS delivers written notice of non-renewal of the 2019 AMA at least 180 days prior to the termination date of the Initial Term or any Extension Term. Twenty-four months after the effective date of the 2019 AMA, CDS is entitled to terminate the 2019 AMA without cause upon 180 days advance written notice to CAM. In the event of such a termination and in addition to the payment of any accrued annual fees due and payable as of the termination date under the 2019 AMA, CDS is required to pay a termination fee equal to (i) the Market Rate Fee or the Cost Plus Fee paid to CAM for the calendar year immediately preceding the termination , and (ii) a one-time payment of the Incentive Fee as if the CRE Portfolio were liquidated for fair market value as of the termination date; or the continued payment of the Incentive Fee as if a termination had not occurred
Business Management Agreement
On April 30, 2019, CAM entered into a Business Management Agreement (the “Management Agreement”) with Investors X whereby CAM will provide Investors X with asset and professional services related to the wind down of Investors X’s homebuilding operations and the continuation of services related to Investors X’s existing land development activities. The aggregate fee payable to CAM from Investors X under the Management Agreement is $937,500, payable in fifteen quarterly installments of $62,500 each.
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COMSTOCK HOLDING COMPANIES, INC.