What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-21 compared with 2023-03-29 · 106 added, 56 removed, 138 unchanged (54% of the section changed)

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We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

Comstock is a leading real estate asset manager and developer of mixed-use and transit-oriented properties in the Washington, D.C.

Since 1985, we have acquired, developed, operated, and sold millions of square feet of residential, commercial, and mixed-use properties.

We benefit from our market-leading position in Northern Virginia's Dulles Corridor, one of the nation’s fastest growing real estate markets that is undergoing an urban transformation thanks to the recently completed construction of a Metro commuter rail connecting Dulles International Airport and the surrounding areas to Washington, D.C.

Our fee-based, asset-light, and substantially debt-free business model allows us to mitigate many of the risks that are typically associated with real estate development.

We provide a broad suite of asset management, property management, development and construction management, and other real estate services to our asset-owning clients, composed primarily of institutional real estate investors, high net worth family offices, and governmental bodies with surplus real estate holdings.

Our primary focus is the continued growth of our managed portfolio;

however, the fundamental strength of our balance sheet permits us to also explore strategic investment opportunities, typically in the form of a minority capital co-investment in select stabilized assets that complement our existing portfolio.

Our asset management services platform is anchored by a long-term full-service asset management agreement with a Comstock affiliate (the "2022 AMA" - see below for additional details) that extends through 2035 and covers most of the properties we currently manage, including two of the largest transit-oriented, mixed-use developments in the Washington, D.C.

Reston Station and Loudoun Station.

As a vertically integrated real estate services company, we self-perform all property management activity through three wholly owned operational subsidiaries:

CHCI Commercial Management, LC (“CHCI Commercial”);

CHCI Residential Management, LC (“CHCI Residential”);

and ParkX Management, LC (“ParkX”).

All 41 properties included in our managed portfolio have entered into property management agreements with our operational subsidiaries that provide for market-rate fees related to our services, including 10 commercial parking garages owned by unaffiliated parties and managed by ParkX.

We aspire to be among the most admired real estate asset managers, operators, and developers by creating extraordinary places, providing exceptional experiences, and generating excellent results for all stakeholders.

Our commitment to this mission drives our ability to expand our managed portfolio of assets, grow revenue, and deliver value to our shareholders.

Recent Developments

We are a leading asset manager, developer, and operator of mixed-use and transit-oriented properties in the Washington, D.C.

We have become the area’s premier real estate service company by creating extraordinary places, delivering exceptional experiences, and generating excellent results for all stakeholders.

We provide a comprehensive suite of real estate services to our asset-owning clients, including asset management, property management, development and construction management, and more.

Our client base is composed primarily of institutional real estate investors, high net worth family offices, financial institutions, and governmental bodies seeking to develop real estate they own through public-private partnerships.

We employ a talented staff of real estate professionals that are led by our seasoned management team and are tasked with delivering high-quality services to the premium, strategically located assets in our managed portfolio.

We primarily operate under long-term asset management and property management agreements that provide recurring fee-based revenue streams.

Our asset management services platform is anchored by a long-term, full-service asset management agreement with an affiliate that includes a cost-plus fee structure and covers all of the properties in our Anchor Portfolio (the "2022 AMA" - see below for additional details).

As a vertically integrated real estate services company, we perform all property management services through three wholly owned subsidiaries:

CHCI Commercial, CHCI Residential, and ParkX Management ("ParkX").

All properties included in our managed portfolio have entered into property management agreements with our operational subsidiaries that provide for market-rate fees related to our services.

Our asset-light, debt-free business model allows us to substantially mitigate risks that are typically associated with real estate development and operation.

The fee-based approach we have adopted helps drive consistent, predictable top-line growth and provides us with a streamlined balance sheet that grants us maximum flexibility to explore potential growth opportunities outside of our core business operations.

We distinguish ourselves from industry peers through an established standard of excellence that extends from who we hire to how we deliver our broad suite of real estate services.

We are able maintain this high standard because We Show Up - every day, in person, in a collaborative environment that is structured to deliver on our mission to make a difference for our customers, our stakeholders, and in the communities that we serve.

Managed Portfolio

The following table summarizes the operating assets that are included in our managed portfolio:

Type # of Assets Size/Scale % Leased

Commercial 13 2.0 million sqft.

Residential 6 1.8 million sqft.

/ ~1,700 units 97%

18,000+ spaces

1 Total includes 13 commercial parking garages owned by unaffiliated parties and managed by ParkX.

In addition, we manage the following assets that are under construction and scheduled for delivery in the next 12 to 24 months:

• 3 commercial assets that represent approximately 600,000 square feet;

• 1 residential asset with 420 units representing approximately 430,000 square feet;

• 1 JW Marriott-branded hotel/condominium with 243 keys and 95 residential units representing a total of approximately 520,000 square feet;

• 2 commercial parking garages with approximately 2,900 spaces.

Our development pipeline currently includes 5 commercial assets that represent approximately 1.5 million square feet, 6 residential assets with 2,599 units that represent approximately 2.8 million square feet, and 1 hotel that will include 140 keys.

At full build out, our managed portfolio of assets is currently projected to total 68 assets representing nearly 10 million square feet.

The following tables provide further details on our managed portfolio:

Anchor Portfolio

Name Status Description

Reston Station Operating +

Under Construction +

In Development Among the largest mixed-use, transit-oriented developments in the Washington, D.C.

region, covering nearly 90 acres spanning the Dulles Toll Road and surrounding the Wiehle Reston-East Metro Station and strategically located mid-way between Tysons, Va.

and Dulles International Airport on Metro's Silver Line (Fairfax County, Va.)

Loudoun Station Operating +

In Development Loudoun County’s first fully integrated mixed-use, transit-oriented development located at the terminus station, Metro's Ashburn Station on the Silver Line in Ashburn, Va (Loudoun County, Va.)

Herndon Station In Development Located in the Historic Downtown District of the Town of Herndon, Va., this planned mixed-use development is subject of a public-private partnership with the Town of Herndon

Other Portfolio Assets

Name Status Description

The Hartford Operating Acquired in 2019, this 211,000 square foot mixed-use building is located adjacent to the Clarendon Station on Metro's Orange Line and is the subject of a joint venture with DivcoWest and Comstock Partners, LC.

The premier office tower in the Ballston Corridor submarket of Arlington County, Va.

BLVD Forty Four Operating Acquired in 2021, this 15-story, mixed-use 250-unit, luxury high-rise apartment tower is located adjacent to BLVD Ansel and just 1 block from the Rockville Station on Metro’s Red Line in Rockville, Md (Montgomery County) and is the subject of a joint venture with Comstock Partners, LC.

The two-building complex is the premier residential offering in Rockville Town Center.

BLVD Ansel Operating Acquired in 2022, this 18-story, mixed-use 250-unit, luxury high-rise apartment tower is located adjacent to BLVD Forty Four and just 1 block from the Rockville Station on Metro’s Red Line in Rockville, Md (Montgomery County) and is the subject of a joint venture with Comstock Partners, LC.

The two-building complex is the premier residential offering in Rockville Town Center.

Comstock 41 Operating Acquired in 2023, this 18,150 square foot parcel located at 41 Maryland Ave.

in Rockville, Md.

and is adjacent to BLVD Forty Four;

currently a surface parking lot operated by ParkX Management, LC;

provides an excellent opportunity for significant value enhancement through by-right entitlements for approximately 117 residential units

Investors X Operating Investment in Comstock Investors X, LC that owns legacy homebuilding assets that are currently being monetized through market-rate sales expected to be completed in 2024

Parking Operating Commercial parking garages & spaces managed by ParkX Management, LC located at affiliated properties and third-party locations

Comstock 41 - Additional Information

Given its proximity to BLVD 44, we plan to explore rezoning opportunities at Comstock 41 that would allow for potential relocation of moderately-priced dwelling units from BLVD 44 to Comstock 41 as well as utilization of excess parking capacity at both BLVD 44 and BLVD Ansel.

In conjunction with the acquisition, we entered into a contingent fee agreement with BLVD 44 should these pursuits prove successful (See Note 14 in the Notes to Consolidated Financial Statements for additional information).

We intend to maintain a limited financial role in any future development activities that may occur at this site and plan to only offer fee-based development and asset management services to any affiliate or suitable third-party financial sponsor of any potential future developments.

Significant Developments

CES Divestiture

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Clemente and certain family members, which covers our Anchor Portfolio of assets (the "2022 AMA").

on the imputed profit of Anchor Portfolio assets, generally as each is stabilized and as further specified in the agreement.

The 2022 AMA increased the base fees we collect, expanded the services that qualify for additional supplemental fees, extended the term through 2035, and most notably introduced a mark-to-market incentive fee based on the imputed profit of Anchor Portfolio assets, generally as each is stabilized and as further specified in the agreement.

(See Notes 10 and 14 in the Notes to Consolidated Financial Statements for additional information).

Our commitment to this mission drives our ability to expand our managed portfolio of assets, grow revenue, and deliver value to our shareholders.

Our real estate development and asset management operations are primarily located in the greater Washington, D.C.

area, where we believe our decades of experience provides us with the best opportunity to continue developing, managing, and investing in high-quality real estate assets and capitalizing on positive growth trends.

We plan to pursue further expansion of our wholly owned property management subsidiaries to increase recurring, fee-based revenue streams as we continue to develop additional relationships with new customers that require the expert real estate asset management, development management, construction management and other services that we routinely provide.

We believe that we are properly staffed for current market conditions and feel that we will maintain the ability to manage risk and pursue additional growth across each of our operational subsidiaries.

Given current market conditions, we feel more opportunities to acquire distressed properties at below market prices may arise.

We remain well-positioned to capitalize on such opportunities due to our asset-light, debt-free business model that has strengthened our balance sheet and provided us with the flexibility to pursue unique growth opportunities across all facets of our vertically integrated operating platform.

COVID-19 Update

The impact of the COVID-19 pandemic has caused uncertainty and business disruptions to both the real estate market in the greater Washington, D.C.

region and the U.S.

economy as a whole.

While we have not experienced a significant impact on our business resulting from COVID-19 to date, the extent to which it will impact our financial results will depend on future developments, which cannot be predicted.

We continue to monitor the ongoing impact of the COVID-19 pandemic, including the potential effects of notable variants of the COVID-19 virus.

The health and safety of our employees, customers, and the communities in which we operate remains our top priority.

Although the long-term impact of the COVID-19 pandemic remains uncertain, we believe that our business model is well-positioned to withstand any future potential negative impacts from the pandemic.

Our management team is committed to executing on the Company's mission to create extraordinary places for people to live, work, and play.

We believe that we are properly staffed for current market conditions and have the ability to manage risk while pursuing opportunities for additional growth as opportunities arise.

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

area, where we have operated, developed, and acquired high-quality assets for nearly 40 years, providing us with the leverage needed to capitalize on the region's numerous positive growth trends.

On May 11, 2023, the U.S.

Department of Health and Human Services declared an end to the public health emergency for COVID-19.

While we never experienced any significant impacts on our business resulting from COVID-19, future regional or global health emergencies may have a negative impact on our results of operations and financial condition.

Although the long-term impact of the COVID-19 pandemic on the greater Washington, D.C.

area real estate market remains uncertain, we believe that our Anchor Portfolio is well positioned to withstand any future potential negative impacts.

Results of Operations

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Other income (expense):

Interest expense (222) (235)

Interest income (expense), net 96 (222)

Gain (loss) on real estate ventures (1,187) 121

Other income 2 6

Other income (expense), net 79 2

Income (loss) from continuing operations before income tax 8,152 7,853

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Revenue increased 13.8% in 2023.

The $8.2 million comparative increase was primarily driven by a $3.9 million increase in incentive fees, which were earned pursuant to the terms of the 2022 AMA.

Also contributing to the increase was the growth and improved performance of our managed portfolio, which included additional properties in 2022 and produced $2.2 million of additional asset management fees, $0.6 million of additional property management fees, a $1.3 million increase in recorded leasing fees, and a $2.8 million increase in reimbursable staffing charges.

These increases were partially offset by a $3.1 million decrease in loan origination fees, primarily related to the 2021 refinancing of the Reston Station office portfolio.

The $5.4 million comparative increase was primarily driven by the continued expansion of our managed portfolio, which included 8 additional assets in 2023.

Recurring asset management and property management fee-based revenue increased by a combined $3.0 million, or 12.6%, and reimbursable staffing charges increased $2.1 million, or 25.3%.

Incentive fee revenue also increased 22.7% to $4.8 million, however that increase was offset by a $0.8 million decrease in supplemental leasing, acquisition, and development fee revenue due to higher transactional volume in 2022.

Operating costs and expenses

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Operating costs and expenses increased 13.4% in 2023.

The $5.3 million comparative increase was primarily due to a $5.4 million increase in personnel expenses stemming from increased headcount and employee compensation increases (including bonus expense), partially offset by a $0.9 million decrease in co-broker expenses stemming from the 2021 Reston Station refinancing transaction.

The $4.2 million comparative increase was primarily due to a $2.6 million increase in personnel expenses from increased headcount and employee compensation.

Also driving the variance were a $0.4 million increase in rent expense stemming from the corporate headquarters lease expansion that was executed in 2022, a $0.3 million increase in regulatory and compliance costs, and a $0.2 million increase in IT expenditures.

Other income (expense)

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2023 2022 $ %

Interest expense $ (222) $ (235) $ 13 (5.5) %

Interest income (expense), net $ 96 $ (222) $ 318 (143.2) %

Gain (loss) on real estate ventures (1,187) 121 (1,308) N/M

Other income 2 6 (4) (66.7) %

Total other income (expense) $ (99) $ (243) $ 144 (59.3) %

Other income (expense) changed by $0.1 million in 2022, primarily driven by primarily driven by higher mark-to-market valuations of the fixed-rate debt associated with our equity method investments in the current period, as well as gains on the performance of our title insurance joint venture with Superior Title Services, Inc., driven by higher volume as compared to the prior period.

Provision for from income tax was $0.1 million in 2022, compared to a tax benefit of $11.2 million in 2021.

The significant benefit in 2021 was primarily due to the partial $11.3 million release of a deferred tax asset valuation allowance, which was derived from our ability to consistently deliver positive net income from continuing operations and our expectation that we will continue to generate future taxable income.

Other income (expense), net 79 2 77 N/M

Total other income (expense) $ (1,012) $ (99) $ (913) N/M

Other income (expense) changed by $(0.9) million in 2023, primarily driven by primarily driven by a $1.3 million net decrease in mark-to-market valuations of equity method investments in real estate ventures, primarily due to the increased interest rate environment.

The decrease was partially offset by a $0.3 million increase in interest income (expense) that stemmed from interest earned on money market sweep accounts in 2023 and the full pay down of our outstanding debt in 2022.

Provision for income tax was $0.4 million in 2023, compared to 0.1 million in 2022.

The $0.3 million increase was primarily due to higher pre-tax book income given that valuation allowance releases and the net total of book-to-tax adjustments were comparatively flat.

As of December 31, 2023, we had $122.8 million of net operating loss (“NOL") carryforwards.

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To provide investors with additional information regarding our financial results, we prepare certain financial measures that are not calculated in accordance with generally accepted accounting principles in the United States (“GAAP”), specifically Adjusted EBITDA.

We define Adjusted EBITDA as net income (loss) from continuing operations, excluding the impact of interest expense (net of interest income), income taxes, depreciation and amortization, stock-based compensation, and gain (loss) on equity method investments.

We use Adjusted EBITDA to evaluate financial performance, analyze the underlying trends in our business and establish operational goals and forecasts that are used when allocating resources.

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While we believe that Adjusted EBITDA is useful to investors when evaluating our business, it is not prepared and presented in accordance with GAAP, and therefore should be considered supplemental in nature.

Adjusted EBITDA should not be considered in isolation, or as a substitute, for other financial performance measures presented in accordance with GAAP.

Adjusted EBITDA should not be considered

in isolation, or as a substitute for other financial performance measures presented in accordance with GAAP.

Adjusted EBITDA may differ from similarly titled measures presented by other companies.

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Net income (loss) from continuing operations $ 7,784 $ 7,728

Interest expense 222 235

Interest (income) expense, net (96) 222

Income taxes 368 125

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We have historically financed our operations with internally generated funds and borrowings from our credit facilities.

For additional information, see Note 7 in the Notes to Consolidated Financial Statements.

(See Note 7 in the Notes to Consolidated Financial Statements for additional information).

We believe we currently have adequate liquidity and availability of capital to fund our present operations and meet our commitments on our existing debt.

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Year Ended December 31,

2023 2022 Change ($)

Continuing operations

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Operating Activities

Net cash provided by operating activities decreased by $0.3 million in 2022, primarily driven by a $3.6 million incremental cash outflow stemming from changes to our net working capital, including increased accounts receivable, partially offset by a $3.3 million increase in net income from continuing operations after adjustments for non-cash items that contributed to the comparative increase.

The $0.6 million variance in net operating cash activity was primarily driven by a $1.9 million increase in net income from continuing operations after adjustments for non-cash items, partially offset by a $1.3 million incremental cash outflow stemming from changes to our net working capital that was primarily due to decreased accrued personnel costs.

Investing Activities

Net cash provided by (used in) investing activities decreased by $3.4 million in 2022, primarily driven by primarily driven by a $3.3 million decrease in distributions from real estate investments, a $0.4 million increase in fixed and intangible asset purchases, and a $0.7 million decrease in investments in real estate ventures, partially offset by $1.0 million in proceeds received from the CES divestiture.

The $0.6 million variance net investing cash activity was primarily driven by a $1.1 million decrease in investments in real estate ventures and a $0.4 million decrease in fixed asset purchases, partially offset by $1.0 million in proceeds received from the CES divestiture that was finalized in the first quarter of fiscal year 2022.

Financing Activities

Net cash used in financing activities increased by $9.8 million in 2022, primarily driven a $4.0 million cash payment made in connection with the early redemption of our Series C preferred stock and a $5.5 million payment made to satisfy the outstanding balance of our credit facility.

The $9.7 million variance in net financing cash activity was primarily driven by a $4.0 million cash payment made in 2022 related to the early redemption of Series C Preferred Stock and a $5.5 million payment made in 2022 to satisfy the outstanding balance of our credit facility.

Off-Balance Sheet Arrangements

From time to time, we may have off-balance-sheet unconsolidated investments in real estate ventures and other unconsolidated arrangements with varying structures.

For a full discussion of our current investments in real estate ventures, see Note 5 in the Notes to Consolidated Financial Statements.

(See Note 5 in the Notes to Consolidated Financial Statements for additional information).

Critical Accounting Policies and Estimates

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We consider a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIE’s economic performance, including evaluating the nature of relationships and activities of the parties involved and, where necessary, determining which party within a related-party group is most closely associated with the VIE and would therefore be considered the primary beneficiary.

We determine primary beneficiary status of a VIE at the time of investment and perform ongoing

reassessments to evaluate whether changes in the entity’s capital structure or changes in the nature of its involvement with the entity result in a change to the VIE designation or a change to its consolidation conclusion.

We have minority voting and economic interests in our investments in real estate ventures and do not control the activities that most significantly impact the economic performance.

We have determined we are not the primary beneficiary for any of our investments in real estate ventures and therefore do not include them in our consolidated balance sheets as of December 31, 2022 and 2021.

We determine primary beneficiary status of a VIE at the time of investment and perform ongoing reassessments to evaluate whether changes in the entity’s capital structure or changes in the nature of its involvement with the entity result in a change to the VIE designation or a change to its consolidation conclusion.

We have minority voting and economic interests in our investments in real estate ventures that we have elected to report at fair value and do not control the activities that most significantly impact their economic performance.

We have determined we are not the primary beneficiary in these investments, and therefore do not consolidate them into our balance sheets as of December 31, 2023 and 2022 or into our statements of operations for the years ended December 31, 2023 and 2022.

Revenue - Incentive Fees

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Due to the subjective and potentially volatile nature of this variable consideration, we only recognize revenue on Incentive Fees for each managed asset when 1) any material uncertainties associated with the valuation of real estate assets that drive Incentive Fees are substantially resolved and 2) it is probable that a significant reversal in the amount of related cumulative Incentive Fee revenue recognized will not occur.

As a result, we have only recognized Incentive Fees at or near each asset's respective triggering event (as detailed in the 2022 AMA) when imputed profit could be reasonably calculated and relied upon to not materially change.

For the year ended December 31, 2022, we recognized revenue from Incentive Fees of $3.9 million, stemming from an operating asset triggering event on October 1, 2022 that is the first in series of annual operating asset triggering events that are scheduled each October 1 through 2024.

As a result, we only recognize Incentive Fees at or near each asset's respective triggering event (as detailed in the 2022 AMA) when imputed profit could be reasonably calculated and relied upon to not materially change.

For the years ended December 31, 2023 and 2022, we recognized revenue from Incentive Fees of $4.8 million and $3.9 million, respectively.

These operating asset triggering events are part of a series of annual operating asset triggering events that began on October 1, 2022, and are scheduled each October 1 through 2024.

Subsequent to these scheduled triggering events, and in accordance with terms pursuant to the 2022 AMA, incentive fees may be recognized on assets currently under development upon the achievement of future triggering events tied to various metrics that indicate stabilization, such as occupancy and leasing rates.

(See Note 14 in the Notes to Consolidated Financial Statements for additional information).

Income taxes are accounted for under the asset and liability method.

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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-K

Item 7. Management’s Discussion and Analysis