Comstock Holding Companies, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the notes thereto and Management’s Discussion and Analysis included in our 2023 Annual Report on Form 10-K and our Condensed Consolidated Financial Statements and the notes thereto included elsewhere in this document. Unless otherwise indicated, references to “2024” refer to the three months ended March 31, 2024 and references to “2023” refer to the three months ended March 31, 2023. The following discussion may contain forward-looking statements that reflect our plans and expectations. Our actual results could differ materially from those anticipated by these forward-looking statements. 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. Overview We are a leading asset manager, developer, and operator of mixed-use and transit-oriented properties in the Washington, D.C. region. 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 (1) 14 2.3 million sqft. 82% Residential 6 1.8 million sqft. / ~1,700 units 96% ParkX - Garages 30 ~20,000 spaces ParkX - Security & Other 15 ~1,500 hrs/week Total 65 (1) % leased reflects Q124 delivery new office tower located in The Row at Reston Station. Excluding this newly delivered property, the % leased for the Commercial portfolio is 93%. 16 TABLE OF CONTENTS In addition, we manage the following assets that are under construction and scheduled for delivery in the next 12 to 24 months: • 2 commercial assets that represent approximately 266,000 square feet; • 1 residential asset with 420 units representing approximately 430,000 square feet; • 1 JW Marriott-branded hotel/condominium with 243 keys and 94 residential units representing a total of approximately 520,000 square feet; and • 1 commercial parking garages with approximately 1,300 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 82 assets representing nearly 10 million square feet. The following tables provide further details on the assets that comprise 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 12 in the Notes to Condensed Consolidated Financial Statements for additional information). 17 TABLE OF CONTENTS 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. Outlook Our management team is committed to executing our goal to provide exceptional experiences to those we do business with while maximizing shareholder value. We believe that we are properly staffed for current market conditions and the foreseeable future and feel that we will maintain the ability to manage risk and pursue opportunities for additional growth as market conditions warrant. Our real estate development and asset management operations are primarily focused on 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 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. Results of Operations The following tables set forth consolidated statement of operations data for the periods presented (in thousands): Three Months Ended March 31, 2024 2023 Revenue $ 10,638 $ 10,275 Operating costs and expenses: Cost of revenue 8,885 8,323 Selling, general, and administrative 535 564 Depreciation and amortization 68 67 Total operating costs and expenses 9,488 8,954 Income (loss) from operations 1,150 1,321 Other income (expense): Interest income 141 — Gain (loss) on real estate ventures (193) (411) Other income (expense), net 22 — Income (loss) from operations before income tax 1,120 910 Provision for (benefit from) income tax 210 156 Net income (loss) $ 910 $ 754 Comparison of the Three Months Ended March 31, 2024 and 2023 Revenue The following table summarizes revenue by line of business (in thousands): Three Months Ended March 31, 2024 2023 Change Amount % Amount % $ % Asset management $ 6,255 58.8 % $ 6,529 63.5 % $ (274) (4.2) % Property management 2,745 25.8 % 2,606 25.4 % 139 5.3 % Parking management 1,638 15.4 % 1,140 11.1 % 498 43.7 % Total revenue $ 10,638 100.0 % $ 10,275 100.0 % $ 363 3.5 % Revenue increased 3.5% in 2024. The $0.4 million comparative increase was primarily driven by the continued expansion of our managed portfolio that included 20 additional assets in 2024, driving a $0.5 million, or 44.5%, increase in recurring property management fee-based revenue and a corresponding $0.2 million increase in reimbursable staffing charges. Partially offsetting the revenue increase was a $0.3 million net decrease in supplemental revenue driven by significant finders' fees associated with 2023 leasing activity. 18 TABLE OF CONTENTS Operating costs and expenses The following table summarizes operating costs and expenses (in thousands): Three Months Ended March 31, Change 2024 2023 $ % Cost of revenue $ 8,885 $ 8,323 $ 562 6.8 % Selling, general, and administrative 535 564 (29) (5.1) % Depreciation and amortization 68 67 1 1.5 % Total operating costs and expenses $ 9,488 $ 8,954 $ 534 6.0 % Operating costs and expenses increased 6.0% in 2024. The $0.5 million increase was primarily due to a $0.3 million net increase in personnel expenses stemming from increased headcount and employee compensation, as well as other minor increases in billable costs that stem from our overall managed portfolio growth. Other income (expense) The following table summarizes other income (expense) (in thousands): Three Months Ended March 31, Change 2024 2023 $ % Interest income $ 141 $ — $ 141 N/M Gain (loss) on real estate ventures (193) (411) 218 (53.0) % Other income (expense), net 22 — 22 N/M Total other income (expense) $ (30) $ (411) $ 381 N/M Other income (expense) changed by $0.4 million in 2024, primarily due to a $0.2 million improvement in mark-to-market valuation impacts from equity method investments in real estate ventures and a $0.1 million increase in interest income stemming from interest earned on money market sweep accounts that were not active in 2023. Income taxes Provision for income tax was $0.2 million in both 2024 and 2023. The effective tax rates for the three months ended March 31, 2024 and 2023 differ from the U.S. federal statutory tax rate of 21% primarily due to state income taxes and the impact of stock compensation shortfall/windfall adjustments. Non-GAAP Financial Measures 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. We expect to compute Adjusted EBITDA consistently using the same methods each period. We believe Adjusted EBITDA is a useful measure because it permits investors to better understand changes over comparative periods by providing financial results that are unaffected by certain non-cash items that are not considered by management to be indicative of our operational performance. 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 may differ from similarly titled measures presented by other companies. 19 TABLE OF CONTENTS The following table presents a reconciliation of net income (loss), the most directly comparable financial measure as measured in accordance with GAAP, to Adjusted EBITDA (in thousands): Three Months Ended March 31, 2024 2023 Net income (loss) $ 910 $ 754 Interest income (141) — Income taxes 210 156 Depreciation and amortization 68 67 Stock-based compensation 246 238 (Gain) loss on real estate ventures 193 411 Adjusted EBITDA $ 1,486 $ 1,626 The $0.1 million decrease in Adjusted EBITDA is primarily driven by higher supplemental revenue from leasing finders' fees in 2023, partially offset by an increase in recurring fee-based property management revenue in the current period. Liquidity and Capital Resources Liquidity is defined as the current amount of readily available cash and the ability to generate adequate amounts of cash to meet the current needs for cash. We assess our liquidity in terms of our cash and cash equivalents on hand and the ability to generate cash to fund our operating activities. Our principal sources of liquidity as of March 31, 2024 were our cash and cash equivalents of $16.2 million and our $10.0 million of available borrowings on our credit facility. Significant factors which could affect future liquidity include the adequacy of available lines of credit, cash flows generated from operating activities, working capital management and investments. Our primary capital needs are for working capital obligations and other general corporate purposes, including investments and capital expenditures. Our primary sources of working capital are cash from operations and distributions from investments in real estate ventures. We have historically financed our operations with internally generated funds and, more rarely and only when necessary, borrowings from our credit facilities. (See Note 5 in the Notes to Condensed Consolidated Financial Statements for additional information). We believe we currently have adequate liquidity and availability of capital to fund our present operations. Cash Flows The following table summarizes our cash flows for the periods indicated (in thousands): Three Months Ended March 31, 2024 2023 Change ($) Net cash provided by (used in) operating activities $ (2,241) $ (2,566) $ 325 Net cash provided by (used in) investing activities 119 197 (78) Net cash provided by (used in) financing activities (444) (294) (150) Net increase (decrease) in cash and cash equivalents $ (2,566) $ (2,663) $ 97 Operating Activities The $0.3 million decrease in net cash used in operating activities was primarily driven by a $0.4 million incremental cash inflow stemming from changes to our net working capital, partially offset by an immaterial decrease in net income from continuing operations after adjustments for non-cash items. The net working capital increase was primarily influenced by increased accounts receivable collections and non-qualified deferred compensation accruals, partially offset by a comparative decrease in accounts payable and accrued liabilities in the current period. Our first quarter operating cash activity in both periods presented resulted in a net use of cash due to the scheduled payout of year-end bonus accruals. 20 TABLE OF CONTENTS Investing Activities The $0.1 million decrease in net cash provided investing activities was primarily driven by a $0.3 million increase in purchases of securities to fund non-qualified deferred compensation plan liabilities and a $0.1 million increase in purchases of fixed assets, partially offset by a $0.3 million increase in distributions received from investments in real estate ventures. Financing Activities The $0.2 million increase in n et cash used in financing activities was primarily driven by a $0.2 million increase in cash paid for taxes related to the net share settlement of equity awards. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable.