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Item 2. Management’s Discussion and Analysis

2021-08-16 compared with 2021-05-14 · 53 added, 42 removed, 84 unchanged (53% of the section changed)

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.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this report.

This discussion and analysis contains forward-looking statements that involve risks and uncertainties.

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We also invest capital on behalf of our asset management clients and institutional real estate investors in office, retail, residential and mixed-use properties, generally retaining an economic interest for the Company and providing management services to those properties, thereby enabling the Company to increase its assets under management (“AUM”) in order to realize competitive advantages of scale and enhance our overall returns.

The Company also provides additional fee-based real estate services, including corporate planning, capital markets, brokerage, title insurance, design, and environmental consulting and engineering services, to properties in the Company’s managed portfolio and to other clients in the U.S.

Mid-Atlantic Region.

As of March 31, 2021, our AUM consisted of 26 operating assets comprising 13 commercial assets totaling approximately 1.9 million square feet and 4 multifamily assets totaling 1,123 units, and 9 commercial garages comprised of over

8,000 parking spaces.

The Company also provides additional fee-based real estate services, including capital markets, brokerage, and title insurance to properties in the Company’s managed portfolio.

As of June 30, 2021, our AUM consisted of 26 operating assets comprising 13 commercial assets totaling approximately 1.9 million square feet and 4 multifamily assets totaling 1,123 units, and 9 commercial garages comprised of over 8,000 parking spaces.

Additionally, we have:

(i) one commercial asset currently under-construction and scheduled for delivery in 2022 totaling approximately 250,000 square feet that is 99% pre-leased;

(i) one commercial asset currently under-construction and scheduled for delivery in

2022 totaling approximately 250,000 square feet that is 99% pre-leased;

and (ii) 18 development pipeline assets consisting of approximately 2.0 million square feet of additional planned commercial development, approximately 1,700 multifamily units and 2 hotel assets that will include 370 keys.

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 Mid-Atlantic Region.

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.

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In addition to the various recurring asset management fee-based revenue received by the Company, we also generate additional revenue from co-investments with our investment partners in certain property acquisitions and expect to receive performance-based incentive compensation from assets in our Anchor Portfolio and other assets in our managed portfolio.

The Company can earn these incentive-based fees upon the occurrence of certain transaction-related events, including asset acquisitions or dispositions, asset related capital market transactions, leasing, marketing and property management, development and construction management, real title services, and environmental services, and when the performance of a subject property meets defined performance metrics.

The Company can earn these incentive-based fees upon the occurrence of certain transaction-related events, including asset acquisitions or dispositions, asset related capital market transactions, leasing, marketing and property management, development and construction management, real title services, and when the performance of a subject property meets defined performance metrics.

The co-investment business plans are property specific and therefore vary in expected duration but are generally expected to be between four and seven years;

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Our real estate development and management operations are primarily focused on the greater Washington, D.C.

region, where we believe our 30-plus years of experience provides us the best opportunity to continue leveraging our significant experience acquiring, developing, and managing high quality real estate assets and capitalizing on positive growth trends, while our environmental consulting and remediation management services business is well positioned to capitalize on opportunities to continue its recent growth throughout the entire U.S.

Mid-Atlantic region.

Managed Portfolio

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Currently, Comstock’s managed portfolio of Reston Station has approximately 1.7 million square feet of mixed-use development completed, including 448 residential units, approximately 1.2 million square feet of office, approximately 40,000 square feet of retail and more than 6,000 parking spaces, including one of the largest underground commuter parking garages and bus transit facilities in the region.

The Company is providing a wide variety of its real estate and asset management services to the project pursuant to the 2019 AMA, including development and construction management services, leasing management services, property management services, capital markets services, and environmental services.

Loudoun Station

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The Hartford Building

In late 2019, the Company partnered with Comstock Partners, LC (“Partners”), an entity that is controlled by our CEO, and wholly owned by Mr.

In late 2019, the Company partnered with Partners, an entity that is controlled by our CEO, and wholly owned by Mr.

Clemente and certain family members, to acquire a Class-A office building immediately adjacent to Clarendon Station on Metro’s Orange Line in Arlington County’s premier transit-oriented office market, the Rosslyn-Ballston Corridor.

Built in 2003, the 211,000 square foot mixed-use LEED GOLD building is approximately 78% leased to multiple high-quality tenants.

Built in 2003, the 211,000 square foot mixed-use building is LEED GOLD certified.

In February 2020, the Company arranged for DivcoWest to purchase a majority ownership stake in the Hartford Building and secured a $87 million loan facility from MetLife.

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Results of Operations

Three months ended March 31, 2021 compared to the three months ended March 31, 2020

Revenue – asset management

Revenue from asset management for the three months ended March 31, 2021 and 2020 was $6.8 million and $5.4 million, respectively.

The following discussion relates to our results from continuing operations.

Three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020

Revenue for the three months ended June 30, 2021 and 2020 was $6.3 million and $4.5 million, respectively.

This represents an increase of $1.8 million, or 40.4%, compared to prior year.

Revenue increased primarily due to costs that are reimbursable from CDS under the 2019 AMA and recognized as revenue along with the growth in assets under management.

Revenue – real estate services

Revenue from real estate services for the three months ended March 31, 2021 and 2020 was $1.48 million and $1.53 million, respectively.

The slight decrease in quarter over quarter revenues of $54 thousand or 4% was primarily attributable to non-recurring COVID-19 environmental remediation projects in the three months ended March 31, 2020.

Direct costs – asset management

Direct costs – asset management for the three months ended March 31, 2021 and 2020 was $6.1 million and $4.6 million, respectively.

This 31.2% increase amounts to a $1.45 million increase to direct costs - asset management was primarily attributable to an increase in personnel expenses due to the growth of our property management business.

Direct costs – real estate services

Direct costs – real estate services for the three months ended March 31, 2021 and 2020 was $1.1 million and $1.2 million, respectively.

For the three months ended March 31, 2021 direct costs - real estate services decreased $0.1 million or 10.6% primarily due to decreased personnel and subcontractor costs associated with non-recurring COVID-19 environmental remediation projects.

Revenue for the six months ended June 30, 2021 and 2020 was $13.2 million and $9.9 million, respectively.

This represents an increase of $3.2 million, or 32.4%, compared to prior year.

Revenue increased in all periods primarily due to increased costs that are reimbursable from CDS under the 2019 AMA and recognized as revenue along with the growth in assets under management, which were primarily parking garages, and

construction management fees.

The prior period revenue was also reduced by $1.4 million due to the PPP loan under the CARES Act.

Direct costs for the three months ended June 30, 2021 and 2020 was $5.5 million and $3.2 million, respectively.

This 71.3% increase amounts to a $2.3 million increase to direct costs and is primarily attributable to an increase in personnel expenses due to the growth of our property management and asset management businesses.

The prior period payroll and rent expense was also reduced by $1.9 million due to the PPP loan under the CARES Act.

Direct costs for the six months ended June 30, 2021 and 2020 was $11.6 million and $7.8 million, respectively.

This 47.5% increase amounts to a $3.7 million increase to direct costs.

This is primarily attributable to an increase in personnel expenses due to the growth of our property management and asset management businesses.

The prior period payroll and rent expense was also reduced by $1.9 million due to the PPP loan under the CARES Act.

General and administrative

General and administrative expenses for the three months ended March 31, 2021 and 2020 was $694 thousand and $727 thousand, respectively.

For the three months ended March 31, 2021, general and administrative costs decreased $33 thousand or 4.5% primarily attributable to a decrease in headcount within our Real Estate Services segment.

General and administrative expenses for the three months ended June 30, 2021 and 2020 was $322 thousand and $390 thousand, respectively.

For the six months ended June 30, 2021 and 2020, general and administrative costs decreased $76 thousand or 10.7%.

The reductions in both periods are primarily attributable to a decrease in stock compensation expense.

Selling and marketing

Selling & marketing expenses for the three months ended March 31, 2021 and 2020 was $158 thousand and $200 thousand, respectively.

The decrease is attributable to a slight decrease in selling and marketing expenses for our Environmental business unit.

Selling & marketing expenses for the three months ended June 30, 2021 and 2020 was $8 thousand and $1 thousand, respectively.

The expenses for the six months ended June 30, 2021 and 2020 was $18 thousand and $1 thousand, respectively.

The increase is attributable to an increase in selling and marketing expenses in the property management business.

Interest expense

For the three months ended March 31, 2021 and 2020, the Company’s interest expense was $58 thousand and $164 thousand, respectively.

The 64.6% reduction to interest expense quarter over quarter amounts to an $106 thousand decrease in interest expense primarily related to the retiring of the Comstock Growth Fund loan during the three months ended June 30, 2020.

For the three months ended March 31, 2021 and 2020, the Company recognized deferred income tax expense of $2 thousand and $1 thousand, respectively.

For the three months ended June 30, 2021 and 2020, the Company’s interest expense was $58 thousand and $77 thousand, respectively.

The 24.6% reduction to interest expense quarter over quarter amounts to an $19 thousand decrease in interest expense primarily related to the remaining interest expense on the Comstock Growth Fund loan which was retired in the prior year.

For the six months ended June 30, 2021 and 2020, the Company’s interest expense was $116 thousand and $226 thousand, respectively.

The 48.6% reduction to interest expense quarter over quarter amounts to an $110 thousand decrease in interest expense primarily related to the retiring of the Comstock Growth Fund loan during the three months ended March 30, 2020.

For the three months ended June 30, 2021 and 2020, the Company recognized a deferred income tax benefit of $11.3 million and income tax expense of $13 thousand, respectively.

For the six months ended June 30, 2021 and 2020, the Company recognized a deferred income tax benefit of $11.3 million and income tax expense of $14 thousand, respectively.

The significant decrease in income tax expense is due to the release of the valuation allowance against the Company's NOL carryforwards at June 30, 2021.

Income (loss) from discontinued operations

For the three and six months ended June 30, 2021, the loss from discontinued operations of $443 thousand and $587 thousand, respectively, represents the loss generated by CES primarily due to the impairment loss recognized on the reclassification to held for sale.

The income from discontinued operations of $382 thousand and $89 thousand for the three and six months ended June 30, 2020, respectively, represents the income generated by CES primarily due to the reduction of payroll expense as a result of the PPP Loan.

Liquidity and Capital Resources

We finance our Asset Management and Real Estate Services operations, capital expenditures, and business acquisitions with internally generated funds, distributions from our equity method investments, and borrowings from our credit facilities.

See Note 6 in the accompanying consolidated financial statements for more details on our debt and credit facilities.

For the three months ended March 31, 2021, net cash used in operating activities was $1.9 million, primarily related to the increase in related party receivables and the payment of accrued personnel costs.

Fo r the three months ended March 31, 2020, net cash used in operating activities was $1.9 million, primarily related to payment of accrued personnel costs and accounts payable.

Net cash provided by investing activities of $1.7 million and $135 thousand for the three months ended March 31, 2021 and 2020, respectively was primarily related to distributions from equity method investments.

Net cash used in financing activities for the three months ended March 31, 2021 was $104 thousand which was primarily related to taxes paid related to net share settlement of equity awards net of proceeds from notes payable.

Net cash provided by financing activities was $5.4 million for the three months ended March 31, 2020 which was primarily related to proceeds from the Revolver of $5.5 million.

We finance our Asset Management operations, capital expenditures, and business acquisitions with internally generated funds, distributions from our equity method investments, and borrowings from our credit facilities.

See Note 7 in the accompanying condensed consolidated financial statements for more details on our debt and credit facilities.

Cash Flow from Continuing Operations

For the six months ended June 30, 2021, net cash provided by operating activities was $822 thousand, which is primarily related to increases in non-cash expenses of the amortization of the right-of-use lease asset and stock compensation.

The increase was further attributable to a decrease in related party receivables offset by an increase in deferred income taxes related to the release of the valuation allowance as well as payments of accrued personnel costs.

Fo r the six months ended June 30, 2020, net provided by operating activities was $628 thousand, primarily related to non-cash stock compensation and increases in trade receivables offset by a decrease in personnel costs.

Net cash provided by investing activities of $2.5 million and $674 thousand for the six months ended June 30, 2021 and 2020, respectively, was primarily related to distributions from equity method investments.

Net cash used in financing activities for the six months ended June 30, 2021 was $168 thousand which was primarily related to taxes paid related to net share settlement of equity awards net of proceeds from notes payable.

Net cash provided by financing activities was $246 thousand for the six months ended June 30, 2020 which was primarily related to proceeds from the Revolver of $5.5 million offset by the retirement of the Comstock Growth Fund loan.

Critical Accounting Policies and Estimates

There have been no other significant changes to our critical accounting policies and estimates during the three months ended March 31, 2021 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.

There have been no other significant changes to our critical accounting policies and estimates during the six months ended June 30, 2021 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.

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.

See Note 1 - Organization and Basis of Presentation to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Off Balance Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis