COMSTOCK HOLDING COMPANIES, INC. 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, or as otherwise noted.
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 words or 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 specifically to us. Any number of important factors could cause actual results to differ materially from those in the forward-looking statements including, 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; our ability to maintain compliance with stock market listing rules and standards; fluctuations in operating results; our anticipated growth strategies; shortages and increased costs of labor or building materials; natural disasters; our ability to raise debt and equity capital and grow our operations on a profitable basis; and our continuing relationships with affiliates.
On
At this time, we cannot foresee whether the outbreak of COVID-19 will be effectively contained, nor can we predict the severity and duration of its impact. If the outbreak of COVID-19 is not effectively and timely controlled, our business operations and financial condition may be materially and adversely affected as a result of the deteriorating market outlook for the segments and the markets in which we operate, the slowdown in regional and national economic growth, weakened liquidity and financial condition of our customers or other factors that we cannot foresee. Some of the uncertainties related to the Company's operations that are directly related to COVID-19 include, but are not limited to, the severity of the virus, the duration of the outbreak, governmental, business or other actions and their impacts on the Company and our clients, along with short and long term effects of consumer demand that may affect our clients financial position and consequently necessitate changes to our operations. As discussed in Note 14, the Company derives a substantial portion of its revenues from various related party entities associated with real estate properties. Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment and cause our business to suffer in ways that we cannot predict at this time and that may materially and adversely impact our business, financial condition and results of operations. While we have not seen a significant impact to our results from COVID-19 to date, if the virus continues to cause significant negative impacts to economic conditions or consumer confidence, our revenues including our property management revenues, trade receivables, related party receivables, goodwill and our fair value investment in Investors X, results of operations, financial condition and liquidity could be adversely impacted.
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, except as required by law.
We make available, free of charge, on our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after these forms are filed with, or
21
--------------------------------------------------------------------------------
furnished to, the
Overview
As a vertically integrated real estate operating and investment company, we earn
revenue from multiple sources, including fees generated from asset management
services that we provide to our managed portfolio of real estate assets on
behalf of our asset management clients, and fees from additional real estate
related services, including environmental consulting and engineering services
provided to our managed properties and unrelated third party clients in the
The services we provide pursuant to the asset management agreements covering our
AUM properties vary by property, and include property management, development
and construction management, leasing management, acquisition and disposition
management, origination and negotiation of debt and equity facilities, risk
management, and various other property-specific services. Substantially all of
the properties included in our managed portfolio are covered by full-service
asset management agreements encompassing substantially all aspects of
development, construction, and operations management relating to the subject
properties. A limited number of properties in our managed portfolio are covered
by service-specific asset management contracts that focus our services on
defined critical elements of operations, such as marketing, leasing, and
construction management, where the property owner continues to manage other
operating functions. The full-service asset management agreement for our Anchor
Portfolio as defined below is a long-term contract with an original term of 10
years that provides for significant payments to Comstock in the case of early
termination by the asset owner. The asset management agreement for the
Anchoring the Company's asset management services platform is a long-term full
service asset management agreement (the "2019 AMA") with an affiliate of the
Company's Chief Executive Officer,
The 2019 AMA provides the Company fee based revenue based on a general formula
charging the greater of (i) the defined operating costs of the Company plus a
base fee of
22
--------------------------------------------------------------------------------
and bus transit facility adjacent to the
Our Business Strategy
In early 2018, the Company transitioned our business strategy and operating
platform from being focused on the development and sale of residential homes to
our current fee-based services model focused on commercial and mixed-use real
estate primarily in the greater
We believe that we have several strengths that distinguish our new business focus and strategy:
• Revenue Base. Our revenues are generated primarily from recurring asset
management fees and additional real estate services fees. Our asset
management agreements provide a highly visible and reliable source of
revenue and position the Company to enhance bottom line results as the
Company's Anchor Portfolio and other assets under management expand.
• Management Services - During recent years, we have made several changes
to our management team as we refocused our operating platform from
residential home building to commercial real estate and asset
management. As a result of this effort, our current management team has
significant experience managing large-scale portfolios of real estate
assets, including rental apartments, office buildings, hotels,
commercial garages, leased lands, retail properties, mixed-use
developments, and transit-oriented developments.
• Geographic Focus - The properties included in our Anchor Portfolio that
we currently manage are located primarily in the Dulles Corridor, which
is the location of the Silver Line, the first new rail line added to
Washington D.C.'s Metro rail system in almost 20 years, which will serve
Arlington , Fairfax and Loudoun Counties in Virginia . Our property
acquisition initiatives with institutional partners are focused on
multiple high-growth areas throughout the Washington, D.C. region, and
our first such acquisition, which closed in December 2019 , is located in
Arlington County . We also provide environmental consulting and
engineering services throughout a wider region stretching from the
Washington, D.C. region to the Philadelphia, Pennsylvania , and New
Jersey regions.
• Real Estate Services - In addition to the asset management services we
provide in connection with our assets under management, we also provide
a variety of supplemental real estate services in the areas of strategic
corporate planning, capital markets and financial consulting, commercial
mortgage brokerage, title, design and environmental consulting and
engineering services, and industrial hygiene services. Our environmental
services group provides consulting and engineering services,
environmental studies, remediation management services and site-specific
solutions for properties that may require or benefit from environmental
due diligence, site-specific assessments, and industrial hygiene
services. Our real estate services business platform allows us to
generate positive fee income from our highly qualified personnel and
serves as a potential catalyst for joint venture and strategic
acquisition opportunities.
23
--------------------------------------------------------------------------------
• Quality and Depth of Management - We have a highly qualified and
experienced management team with a broad base of deep expertise and a
proven track record providing services to our clients. Our services
platform leverages the diverse capabilities and relationships of our
management team developed over more than thirty years.
• Geographic Focus - Unlike many of our competitors with a national or
international presence, we focus our efforts primarily on the greater
Washington, D.C. metropolitan market, one of the most compelling real
estate markets in the United States , with a near-term focus on the
transit-oriented areas surrounding or proximate to the new Silver Line
on Washington, D.C.'s Metro. The Company believes its significant
presence in the Dulles Corridor and its in-depth understanding of
high-density, mixed-use developments that are encouraged in these high
density transportation nodes give us unmatched insight into emerging
trends that provide both short and long-term opportunities in these
locales.
• The Company's various business units work in concert to leverage the
collective skill sets of our organization - The talent and experience of
our personnel allow workflow flexibility and a multitasking approach to
managing various projects. We believe that our focus and our business
network in the Washington, D.C. market provides us with a competitive
advantage in sourcing and executing on investment opportunities. While
the Company has previously developed numerous properties in multiple key
markets throughout the southeastern United States , and our management
team has experience managing large national portfolios, we believe the
greater Washington, D.C. market provides compelling growth opportunities
for our business.
• Long Track Record - The Company and its management team have been active
in the metropolitan Washington, D.C. region since 1985 and have
developed, acquired, and managed thousands of residential units and
millions of square feet of mixed-use properties throughout the region
and in other key markets in the United States .
• Multiple Public-Private Partnerships - Affiliates of the Company have
been selected by multiple local governments (including Fairfax County ,
Loudoun County , and the Town of Herndon, Virginia ) to develop and manage
large-scale mixed-use and transit facility developments through
public-private partnerships at a time when local jurisdictions are
focused on public-private partnerships as a means of leveraging private
sector capabilities to meet public infrastructure development needs.
• Economic Drivers - Significant growth trends in demand for cyber
security and other technology services in the government sector, as well
as in the private sector, have generated substantial growth and
attracted to Northern Virginia large tech companies, such as Microsoft,
Google, and Amazon. In 2018, Northern Virginia was selected by Amazon as
the location for its highly publicized "HQ2" search for a location to
develop its second headquarters, which it has said will create tens of
thousands of new jobs over the next several years. The Northern Virginia
market has for a number of years captured a majority of the new jobs
created in the Washington, D.C. metropolitan area, including corporate
relocations and expansions, as well as numerous start-ups. Further,
Northern Virginia's significant data infrastructure, capable of serving
the needs of the federal government and its defense and information
contractors, has spurred the expansion and/or relocation of several
federal government agencies, including the FBI, CIA, NSA , and the
Customs and Border Patrol agency, to the Dulles Corridor. The Dulles
Corridor has become known as the "Internet Capitol of the World",
because of its tremendous network of data centers, primarily located in
Loudoun County in the western portion of the Dulles Corridor. Loudoun
County has experienced tremendous growth in data center development and
has become the global leader in data center space while accounting for
more than 40% of national data center space absorption in recent years.
• Diverse Employment Base - The diverse and well-educated employment base
in the greater Washington, D.C. region, coupled with proximity to the
federal government and the presence of well-established government
contractors, is contributing to the attractiveness of the region to
technology companies.
• Metro's Silver Line - Phase I of Metro's Silver Line opened in 2014,
connecting Tysons Corner and Reston to Arlington, Virginia and downtown
Washington, D.C. Phase II is scheduled to open in late 2020 or early
2021 and will extend service from the terminus of Phase I located in the
center of the Company's Reston Station development to Herndon , Dulles
International Airport , and Loudoun County, Virginia , terminating at the
Company's Loudoun Station development.
• Regional Land Use Plans - Recent changes to Comprehensive Land Use Plans
of Fairfax County and Loudoun County encourage high density and
mixed-use development proximate to the new Silver Line Metro Stations,
resulting in compelling growth opportunities for the Company and its
managed portfolio.
24
--------------------------------------------------------------------------------
• Increased Demand for Transit-Oriented and Mixed-Use Developments -
Recent trends indicate commercial tenants are increasingly seeking to
locate (or relocate) offices to urban, mixed-use developments in
"sub-urban" markets, such as Northern Virginia's Dulles Corridor, and
have demonstrated willingness to pay premium rents for commercial space
at the Metro-accessible sites, such as those that make up a significant
portion of the Company's portfolio of managed assets. Additionally,
demand for housing in transit-oriented, mixed-use neighborhoods has
increased steadily over the past decade while home ownership rates have
decreased and demand for high quality rental housing has increased. The
Company has been focused on these emerging trends for more than two
decades and the Company, through the 2019 AMA, controls the development
and asset management of a significant portfolio of high profile assets
at the forefront of the urban transformation taking place in the Dulles
Corridor. With a stabilized portfolio and development pipeline that
include millions of square feet of mixed-use and transit-oriented
properties located at key Metro stations in the Dulles Corridor, the
Company is well positioned to capitalize on trends that we believe will
shape the future commercial real estate landscape and provide
opportunities for significant growth and attractive returns to the
Company
Asset Management Services
2019 AMA
Effective
Pursuant to the 2019 AMA, the Company provides asset management services related
to the build out, lease-up and stabilization, and management of the Anchor
Portfolio. CDS pays the Company and its subsidiaries annual fees 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 revenues generated by properties included in the
Anchor Portfolio; (b) a construction management fee equal to 4% of all costs
associated with Anchor Portfolio projects in development; (c) a property
management fee equal to 1% of the Anchor Portfolio revenues, (d) an acquisition
fee equal to up to 0.5% of the purchase price of acquired assets; 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 Anchor Portfolio pursuant to the 2019 AMA, (y) the costs and expenses of
the Company related to maintaining the public listing of its shares and
complying with related regulator and reporting obligations, and (z) a fixed
annual payment of
In addition to the annual payment of the greater of either the Market Rate Fee
or the Cost Plus Fee, the Company also is entitled on an annual basis to the
following additional fees: (i) an incentive fee equal to 10% of the free cash
flow of each of the real estate assets comprising the Anchor 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
The 2019 AMA is a long-term agreement, with an initial term until
Other Asset Management Agreements. The duration of our fee-based service agreements varies in nature. In addition to the long term nature of the 2019 AMA, our other asset management agreements for our co-investment opportunities are intended to cover the duration of the expected investment cycle of the portfolio property managed and are generally expected to last between four and seven
25
--------------------------------------------------------------------------------
years. However, these arrangements do not typically contain significant early-termination penalties. We also administer many various task-specific limited-service asset management agreements under short-term arrangements generally terminable at will.
Hartford Asset Management Agreement
On
Residential, Commercial and Parking Property Management Agreements
In
During the period of
These property management agreements are each for one (1) year initial terms with successive, automatic one (1) year renewal terms, unless sooner terminated. The Company generally receives base management fees under these agreements based upon a percentage of gross rental revenues for the portions of the buildings being managed in addition to reimbursement of specified expenses, including employment expenses of personnel employed by the Company in the management and operation of each property.
Construction Management Agreements
As of
Real Estate Services
In addition to the asset management services that the Company provides related
to the Anchor Portfolio and other managed assets, the Company's wholly owned
subsidiaries,
Results of Operations
Three months ended
Revenue - asset management
Revenue from asset management for the three months ended
26
--------------------------------------------------------------------------------
Revenue - real estate services
Revenue from real estate services for the three months ended
Direct costs - asset management
Direct costs - asset management for the three months ended
Direct costs - real estate services
Direct costs - real estate services for the three months ended
General and administrative
General and administrative expenses for the three months ended
Selling & Marketing
Selling & marketing expenses for the three months ended
Interest Expense
For the three months ended
Income taxes
For the three months ended
Liquidity and Capital Resources
We finance our Asset Management and Real Estate Services operations, capital
expenditures, and business acquisitions with internally generated funds,
borrowings from our credit facilities and long-term debt. Pursuant to the MTA,
the Company transferred to CDS management of its Class A membership interests in
Investors X, the entity owning the Company's residual homebuilding operations in
exchange for residual cash flows estimated to be
On
27
--------------------------------------------------------------------------------
ten percent (10%) corporate indebtedness maturing in 2020 owed to
As of
Cash Flow
We finance our Asset Management and Real Estate Services operations, capital expenditures, and business acquisitions with internally generated funds, borrowings from our credit facilities and long-term debt.
For the three months ended
Net cash provided by (used in) investing activities attributable to continuing
operations was immaterial for the three months ended
Net cash provided by financing activities attributable to continuing operations
was
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies and
estimates during the three months ended
Recently Issued Accounting Standards
See Note 1 - Organization and Basis of Presentation to the accompanying consolidated financial statements included in this Quarterly Report on Form 10-Q.
Off Balance Sheet Arrangements
None.
© Edgar Online, source
