Comstock Holding Companies Inc (CHCI) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen. My name is Melanie, and I will be your conference coordinator for today's call. I would like to welcome everyone to Comstock Homebuilding Companies, Inc., 2007 final results conference call. Throughout the duration of today's presentation all audio participants will remain in a listen-only format. However, at the conclusion of today's presentation we will be conducting an interactive question and answer session via telephone lines. This conference call may contain forward-looking statements as defined in section 27A I1 of the Securities Act of 1933 as amended, including statements regarding among other things: the Company's business strategy and growth strategy, expressions which identify forward-looking statements, speak only as of the date the statement is made.

These forward-looking statements are based largely on this company's expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond their control. Future developments and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate. This conference call does not constitute an offer to purchase any securities nor a solicitation of a proxy, consent, authorization or agent designation with respect to a meeting of the company stock holders.

At this time I would like to turn the call over to Chris Clemente, Founder and CEO of Comstock. Chris, you may now proceed.

Thank you. Hello, and thank you for joining us today. This is Chris Clemente, Chairman and CEO of Comstock Homebuilding Companies. With me today is Bruce Labovitz, our CFO. Before we start, I would like to thank every member of the Comstock team for their continued dedication to Comstock, and I want to recognize their commitment to our critical cost reduction initiatives. As we have reduced our workforce and our general and administrative expenses, it has been necessary to ask everyone in Comstock to do more with less. And I am grateful for the commitment everyone is showing. I also want to thank our suppliers and subcontractors for working with us to reduce production costs while maintaining a commitment to quality and customer service. Internally we have reduced ourselves to fighting weight bringing down our G&A expenses in the process, but production costs represent approximately 40% to 50% of revenue on traditional products, so reducing these costs is just as critical as reducing overhead.

By now everyone recognizes that the housing market has not begun to recover yet. The severity and duration of this market downturn was underestimated by almost everyone. Early predictions saw the market rebounding late last year. Then predictions were for a recovery early this year or at least by this fall. Now some are predicting no recovery until late '08 or even 2009. Clearly even those that consider themselves experts find it difficult to estimate when consumer confidence in housing will return and demand will increase. Because of the uncertainty, we have been busy taking steps to ensure our ability to survive this downturn and to benefit from the opportunities that always emerge in recovering markets. Accordingly, we have been focused on: reducing costs in all aspects of our business, stabilizing and improving our lending relationships, enhancing our balance sheet by reducing debt while preserving cash, managing our assets in a conservative manner, and satisfying our customers. Since mid-2006 we have made significant progress in these areas.

Some of the steps we have taken and the results we have achieved include the following: we have reduced staff by 35%, and thereby lowered payroll costs significantly. On an annualized basis, this represents cost reductions of approximately $5 million. We believe that we are now properly staffed to manage the current level of activity, and we're confident that when market conditions warrant we will be able to attract qualified personnel. We have negotiated reductions of construction costs as well. Our cost reduction initiatives seeks to reduce construction costs by 20% or more. While the cost reduction vary from trade to trade and market to market, some have even exceeded our expectations. On average we have secured per square foot construction costs reductions of approximately $10 to $14 per square foot or between 7% and 24% depending on the product type and which market. As we continue to pursue lowering these costs, we will be better able to reduce sales prices, increase concessions, or secure favorable mortgage buydowns as needed to meet market demand without further eroding margin.

We have reduced our exposure to condominiums by selling 574 condominium units in bulk sales and two condominium conversion projects in the DC market, generating revenue of approximately $87 million in the process. Demand for multi-family properties among institutional investors continues to be strong in the DC area. This provides alternative buyers for these products, and as demonstrated by these two completed transactions, provides a level of downside protection for certain products. We further reduced our exposure to condominiums through the delivery of the first 304 units at the Eclipse high-rise development generating revenue of approximately $118 million project to date. Additionally, we have substantially completed the second and final building at the Eclipse, ensuring our ability to deliver the remaining units in a timely fashion as the 144 units that remain available for sale are sold. We have reduced the burden of interest carry as a result of these accomplishments and have reduced it further by temporarily repositioning certain other condo projects containing approximately 200 additional units as rental properties. These units are in the DC area, where occupancy rates above 90% are common.

As rental communities these projects are generating annualized cash flow of approximately $1 million, which is being used to offset debt service associated with these properties. We will continue to utilize our strategy of marketing properties of this kind to multiple buyers in the institutional investment community. In the process of disposing of certain projects and land and the due course of delivering units at the Eclipse and other projects, we have reduced the balance of total debt to $230 million as of June 30th. In order to manage our capital resources in addition to selling certain land positions, we also terminated land purchase obligations valued at more than $100 million. In the process we discontinued operation in Myrtle Beach, South Carolina, and Charlotte, North Carolina. These steps have reduced previously anticipated capital needs and have reduced our exposure to weakening markets while positioning Comstock to pursue new land opportunities as land prices and terms become more attractive. Also to manage our capital resources we adjusted our 2006 compensation plans to allocate more senior management compensation to equity. We believe this also further aligns senior management with the interest of shareholders.

Finally, we have stabilized our banking and creditor relationships through negotiations that resulted in maturity dates of several loans being extended, covenants being modified or waived, various loans being refinanced, and certain lenders being replaced with new relationships. Through this process and as a result of our approach to asset management, we have reduced the balance of remaining loan curtailments for 2007 from approximately $205 million at the beginning of this year to approximately $22 million today. While we have additional goals regarding our overall borrowing capacity, we believe that our borrowing arrangements now substantially recognize current market limitations and significantly improve our ability to operate our business. While we are pleased with our accomplishments of the past 12 months, I must caution the market that we remain subject to generally weak conditions in our markets and the -- and sagging consumer confidence in housing as an investment. The currently liquidity crisis facing the financial markets has the potential of prolonging and our deepening this market downturn because of its potential to further dampen consumer confidence and have a negative effect on mortgage availability. Our ability to achieve our sales goals in the current environment remains difficult and cancellations continue to impact net sales.

However, sales did trend upward and cancellations did trend downward slightly in the second quarter as compared to the first. Traffic remains at reasonable levels, but the high level of resell inventory in the market continues to impact the sale of new homes. Even qualified buyers that are eager to purchase a new home are on the sidelines if their purchase ability is contingent on them selling their existing home. Additionally, shorter rate locks could lead to increased cancellations if rates increase while home buyers are trying to sell their existing home. The market is further impacted by general concerns of availability of mortgage financing. In spite of the fact that there is currently adequate supply of mortgage products available for qualified borrowers, we have seen some purchasers forced to change mortgage lenders as a result of their chosen lender being unable to close their loan.

It is worth noting that Comstock is not in the mortgage business. We rely on relationships we have with third party lenders that we consider preferred mortgage providers for our customers. To date these lenders have not failed to honor any commitments made to our purchasers, and we have no reason to believe that they will have any difficulty providing mortgage loans for our purchasers. Further we are confident that our approach to combining the sales process with the finance process at site -- onsite ensures that we know immediately if a prospective purchaser will be able to obtain financing. A recent review of average credit score trends within our backlog and within our shopping -- our home shoppers indicates that -- relatively few potential problems. Our experience with previous cycles leads me to believe that the current buyers market will continue to result in downward pressure on costs associated with land, land development, and construction. Every down cycle begins with reduced demand which erodes pricing power of Homebuilders. As construction activities decline, there is pricing pressure put on suppliers of construction materials and labor, also on Homebuilders G&A budgets and on land prices.

As demonstrated by the staff reductions sweeping our industry, Homebuilders are reducing internal costs where they can. Additionally, as evidenced by the tremendous impairments to the book value of land owned by Homebuilders, the value of land is most definitely being mark-to-market or perhaps even below market. The large number of option deals being abandoned by the Homebuilder group together with the resulting write-offs of land deposits indicates to me that the industry continues to seek equilibrium between cost and values. It is not until it is achieved between the cost to produce homes and the market pricing that demand can be expected to increase. While it is unclear -- we can expect the market to reach the point of -- while it is unclear when we can expect the market to reach the point of equilibrium we continue to see signs that this cycle will follow a predictable path to recovery. Industry operating costs are definitely being reduced. Construction costs are definitely coming down, and land values are beginning to come down and terms are softening.

We believe that as markets adjust to reduced demand, these costs will continue to come down and eventually markets that continue to generate job growth and population growth will see improved demand for new homes. We also believe that due to the continued job growth and population growth in our three markets and our strategy of focusing on the middle market consumer, that Comstock is well positioned to be on the front end of the recovery. Because the timing of the market recovery remains uncertain, Comstock will continue to be focused on the fundamental principles of operating our business amid tough market conditions. For the foreseeable future, we will be focused on: reducing costs in all aspects of our business, enhancing our balance sheet by reducing debt and preserving cash, increasing our sales conversion rates and reducing cancellations, managing our assets in a conservative manner, and enhancing our lending relationships and access to capital, so that we will be prepared to take advantage of attractive opportunities when they emerge.

Nonetheless, these are not the worst conditions we have had to deal with in the 20-plus years of Comstock. And I want the market to understand that we have navigated difficult markets before. We know how to maximize the value of the assets we control. We are definitely doing what is necessary to ensure Comstock survives this downturn, and we will continue to make hard decisions as warranted to provide maximum potential value to our shareholders. That said, I cannot account for the valuations placed on most home-building companies today, including Comstock. While I understand the market's concern about the home-building industry in light of the economic uncertainty that exists today, it is clear to me that market valuations do not come close to recognizing the asset value or the potential -- future earnings potential of the group. Nonetheless, I firmly believe that when demand for new homes improves, as it always does, that the market will again place reasonable values on the sector. Now I would like it turn the call over to Bruce Labovitz, our CFO. And after Bruce discusses our financial results in detail for the quarter, we will be able to answer questions for you. Bruce.

Thanks, Chris. Good morning -- good afternoon. Today I am going to focus on: the results of operations for the second quarter and the first half of the year, changes in our balance sheet and cash flows, results at the Eclipse, credit facilities and covenant compliance, and then finally, projections and guidance. This has been an active quarter for us. We settled on the assembly and sale of Bellemeade. We revised and extended debt terms with several of our lenders, we sold our remaining finished lot inventory at Massey preserve, and we began settling units in the east tower of the Eclipse. In all, the net effect of these transactions was a $63 million net reduction in our debt, a resulted that is in keeping with our current goals of lowering debt and preserving liquidity.

Last week we filed our results of operations for the three and six months ended June 30th, 2007. For the quarter we generated $114 million of total revenue with a net loss of $4.7 million or a loss of $0.29 per share basic and diluted on 16.1 million weighted average shares outstanding. For the six months ended June 30th, we generated revenue of $161 million with a net loss of $6.3 million or a loss of $0.40 per share on 16 million weighted average shares outstanding. For the quarter we recorded new impairment charges of $7.5 million of which $2 million was in connection with the repurchase of units at Bellemeade. $2.9 million was related to other Washington area projects, $2.3 million was associated with Atlanta projects, and $100,000 was associated with projects in Raleigh. On the after-tax basis, using our prevailing tax rate, these impairments represented $4.6 million of our current period loss. Net of these impairments, we operated at a virtual breakeven for the quarter. As always we continue to evaluate our inventory in light of current market conditions and we'll continue as warranted to assess the recoverability of our investments and our projects.

Our gross margin from homebuilding this quarter was 7% as compared to 18% for second quarter 2006 and 13% in the first quarter of 2007. Exclusive of Bellemeade which had a zero margin, the gross margin from homebuilding this quarter was 12%. Much of this quarter's margin erosion came from aggressive pricing on seculative inventory as we made a concerted effort to sell those units. Net of Bellemeade and the Eclipse, our ASP for the first quarter was $284,000 as compared to $308,000 in the third first quarter of 2006. For the first half of the year we generated a gross margin from homebuilding of 9% as compared to 21% for the first half of 2006. Net of Bellemeade the gross margin from homebuilding for the first half of 2007 was 13%. The reduction in gross margin as compared to last year is generally the result of weakened pricing power, increased incentives, and longer project life cycles due to increased cancellations and slower sales paces.

Net of Bellemeade and the Eclipse our ASP for the first half of 2007 was $276,000 as compared to $313,000 for the first half of 2006. SG&A for the quarter was $8.2 million, representing 7% of total revenue as compared to $8.2 million or 17.6% of total revenue in the first quarter of 2007, an $8.4 million or 16.6% of total revenue during the second quarter of last year. SG&A for the the first half of the year was $16.4 million or 10% of total revenue as compared to $16.1 million or 18% of total revenue for the first half of 2006. As you think about SG&A, it is important to remember that within SG&A are both selling and overhead expenses. For the quarter, selling expenses which have a greater degree of variability to them represented $2.9 million of our SG&A or 35% as compared to $2.8 million or 33% for the second quarter of 2006.

For the first half of 2007 selling expenses represented $6.1 million or 37% of SG&A as compared to $4.7 million or 29% for the first half of 2006. The increase in selling expenses as a percentage of SG&A year-to-date is primarily attributable to increased sales commissions associated with increased deliveries deliveries at the Eclipse. Other selling expenses such as advertising, marketing, and model parts stayed relatively unchanged. When what this suggest sincerely while total SG&A is up $300,000 this year over last year general and administrative overhead is down over $1.1 million to $10.3 million for the first half of 2007, as compared to $11.4 million for the first half of 2006. This reduction in fixed overhead is principally been derived from a reduction in workforce. Based on our 2000 -- June 2007 payroll, we lowered salary expense by nearly $3.2 million annually or 22% as compared to June of 2006. In July we further reduced annualized salary expense by an additional $1.6 million, which was another 11% as compared to June of 2006.

Turning to the balance sheet, our book value at June 30th was $122.6 million or $7.09 per share based on 17.3 million total issued and outstanding shares including unvested stock grants. This represents a 514% premium over Friday's closing price. Based on Friday's closing price of $1.95 per share we would have to record a pre-tax impairment charge of $144 million before our book value and market cap were equal. That represents 44% of our current June 30th inventory at cost and 60% of our June 30th inventory at cost exclusive of Potomac yard. Cash on hand at the end of the quarter was down just slightly to just under $16.9 million, but was up slightly after you take into account accounts receivable which represent settlement proceeds in transit. Cash and liquidity continue to be our primary focus. While we do have capital -- while we do have capacity both on our $40 million borrowing base revolver and in our project loans, our cash balances ebb and flow on a daily basis as we settle units and build out our backlog. This year we generated $64 million of cash from operating activities by substantially curtailing our investment in land acquisition and speculative construction of new units. We continue to believe that we have access to liquidity necessary to operate the business and meet our existing obligations. Our unrestricted cash balance today is approximately $10 million.

Speaking of speculative units, as of today we have 426 of what we would consider speculative units, with 56 in Raleigh, 45 in Atlanta, and 354 in the DC area. Of the spec units in in the Washington area 144 are at the Eclipse and 41 are at Barrington where we are temporarily operating the community at a rental in the the market comes back. Net of those two projects our spec inventory is 270 units. Within our total spec inventory 82% are condominiums, 15% are single-family homes and 3% are townhomes, with 65% of the entire spec inventory being what we would consider substantially completed. Net of the Eclipse and Barrington, 72% are condominium, 23% are single family, and 5% are townhomes.

Now we will turn to the Eclipse project. During the quarter we settled $29.6 million of revenue on 72 settlements at the Eclipse. We settled 50 units in the east tower during the last week of June. We ended the quarter with a total of 264 units settled for $99.5 million of revenue and outstanding loan balance of $57 million, and an inventory balance of just under $90 million at $89.2 million. Our gross margin for the quarter increased to 20% at the Eclipse as our average revenue per square foot increased to $499 per square foot as compared to $474 in the first quarter of 2007 and $424 in the fourth quarter of 2006. As of June 30th of this year we had not recognized any deposit forfeitures as income. Since the end of the quarter, we've settled 42 additional units at the Eclipse for $19.7 million of revenue, which translates to additional loan paydown of approximately $18 million before construction draws of approximately $3 million, and what we expect to be approximately $500,000 of deposit forfeitures which will be recognized as income and applied to loan paydown this month. That brings us to 306 units settled and $119.2 million of total revenue from settlements. During the third quarter we expect to settle a total of at least 57 units out of our June 30 backlog for approximately $25.5 million of revenue at an average of $508 per square foot.

During the third quarter we expect to delivery and loan curtailment milestones that trigger a rebalancing of tranche A and tranche B balances under the course loan which will lower the interest costs by four to five percentage points on the remaining debt. In addition, we expect to soon be in a position to settle on the retail condo, which will generate $8.5 million of cash proceeds which can be applied to loan paydown. As we discussed in the 10Q, we resolved our issues from the last 10Q with Reagents Bank and Keybanc. In both cases we extended the maturity it is of the loan and with Keybanc we eliminated the fixed charge coverage covenant until March 31, 2008. In connection with the sale of Bellemeade we entered into loan modifications with Banc of America that extended all remaining B of A loan maturity to say 2008 and significantly reduced near term curtailment requirement,s while securing all previously unsecured balances. During the second quarter we also entered into a new lending relationship with first First Charter Bank in Raleigh, where we secured a $4.5 million construction revolver. We're currently in discussions to expand that line.

And lastly, just last week we received commitments from BB&T to extend the maturities to the remainder of their facilities including the loan at Barrington which was to come due in September. We had been and continue to work closely with our banks and lenders, and at this time we are performing on our commitments and are in compliance with our existing covenants. Our tightest covenant for the third quarter are the fixed charge coverage ratio on our senior unsecured note which will increase to 1.5% to 1% and our minimum tangible net worth covenant with M&T which is $120 million. With a book of $122 million at June 30th, it is a narrow margin, but we have already begun working with M&T to adjust this covenant and feel confident that we will be able to reach accommodation in the event the covenant becomes a problem.

Finally let me once again address the issue of guidance. Given the continued volatility and unpredictability of the residential real estate markets where we operate, we will continue to withhold guidance at this time. We hope that at some time in the not too distant future we will be able to reinstate the practice of offering guidance, but for now we feel it is too imperfect a market for any meaningful degree of accuracy. Thanks, and I will now open up the call to questions.

Thank you. We will now take questions from the telephone lines. (OPERATOR INSTRUCTIONS) There will be a brief pause while the participants register. Thank you for your patience. The first question is from Dan Oppenheim from Banc of America. Please go ahead.

Hi. This is Mike [Woodam] for Dan. Could you give us an update on the Eclipse closings post the quarter end?

Yes. It just went through that in my discussion points, Mike. We settled 42 units since quarter end for $19.7 million of revenue.

Okay. Great. Can you just also give us what you're thinking in terms of paying down debt I guess by the end of this year, or however you're thinking about it with just kind of milestones, what net debt to cap you would like to reach at going out by the end of the year or out?

Sure, Mike. Our goal is to continue to use settlement proceeds and to whatever degree possible sale of assets to reduce our debt. We're currently operating at about a 65% debt to cap. I think realistically it would be nice to see that in the mid-50% at year end. Better -- lower would be better, but I think on a target basis if we're in the mid--50% to upper 50% we would feel good about our accomplishment for the year.

Great. And the -- say the Atlanta and the Raleigh businesses, I know the margins in those segments are negative, I believe. What are you doing there in terms of construction in order to manage the cash flow of those businesses?

Keep in mind those margins are margins are affected by impairment when you're looking at the operating income -- operating incomes, those are impacted by impairment charges, so on an operating basis it is going to be different than as reported from operating income because you've got to factor those in.

But in terms of are you -- like what's your strategy there with putting new money towards construction in those markets or moth balling certain communities?

At the moment I think we're being very discriminating about how we apply capital in those markets. We have certainly curtailed new investment in speculative inventory. Different -- Atlanta is very different from Washington as is Raleigh, in that you need to be in a position to have a little bit more speculative inventory in those markets because the way shoppers buy is on a shorter-term delivery cycle. So what we have done there is set up programs in each of those communities to manage that we have a unit in each of one to three different construction cycles at any given time, and are using basically a replacement methodology there that as a unit sells out of that construction cycle will look to replace it, but we're not taking down new land in any volume. We are meeting some of our option takedown obligations in Raleigh. We've taken down a couple of additional lots in communities like Brookfield and Providence, and then we're being, as I said, fairly careful about our starts in deploying capital on sold inventory.

Great. And just lastly, what about any update on the Belmont Tower with plans to go ahead with that or just holding off on that for now?

Belmont base eight and nine I believe is what you're referring to. And it is actually a 600-unit community of which we've taken down 112 units and have 488 that are still under option, and those 112 are broken up into four 28-unit buildings. We have -- one of those buildings is substantially completed and is now open for sales. We have through the garage level on a second tower, which we had halted about maybe nine months ago we stopped construction on that second building, and the other two we have no immediate plans to start.

None of the buildings there that we are doing any time soon are what you would consider towers. The latter phase that would include the 418 lots that Bruce mentioned is where the high rises would go, and clearly they won't be done unless the market comes back for that kind of product at some time in the future.

I think we have another six years if I recall, something like that on that option.

Maybe even seven. We have an extended option period to buy those lots, so essentially those lots are tied up or committed to us, we think in, for a long enough period of time to allow the market to recover.

Thank you.

Thanks, Mike.

Thank you. The following question is from Chris Lucas from Robert Baird. Please go ahead.

Hi. Good afternoon, guys.

Hi, Chris.

Could you guys give us a little bit of help in terms of the -- what were the major contributor to say the debt paydown in the quarter and the rough amounts associated with different transactions?

Yes. That's -- there are two primary drivers of debt paydown during the quarter. One was the sale of Bellemeade, which was a $47.5 million sale. We had costs -- we had underlying debt of $33 million, and then costs to repurchase the units of about $13 million, so that was $33 million of that reduction.

Okay.

The other big paydowns came -- or paydown came from Potomac yard and east tower and we did just under $30 million of revenue at the Eclipse during the quarter, and at an approximately 93% paydown there you had high $20 million, $27 million, something paydown of debt there, and then you had general settlement activity from the rest of the portfolio. We had the sale of Massey which was a couple million dollars of paydown, and the rest of it is just general proceeds from settlements.

Okay. As far as the Eclipse is concerned, it sounds like you've had an acceleration in cancellations this quarter from just the language you're using. Is -- am I correct in that?

Well, I am not sure if I would call it an acceleration of cancellations. The timing of the Eclipse settlements was such that we noticed our buyers in mid-June that we were ready to start canceling. Those that were ready to come to settlement settled during the last week. There is a 30-day notice provision in the contract, so we were not in a position prior to the the end of June to know who would be coming and who wouldn't. So during the course of July and August we have flushed out those who would and would not be coming to settlements.

So is the -- I think the language you used was 144 speculative units. Does that mean they're unsold now?

That is correct. The remaining units after the backlog that we expect to settle by the end of this quarter.

Right.

We expect there to be 144 units left.

Okay. And --

Of course that's not adjusting for any sales that occur between now and the end of this quarter.

Understood. I guess, then, the question then is what -- do you have a rough sense as to what that inventory represents in terms of potential revenue? Roughly?

Yes. We want to be careful about representing too much certainty around what we think that revenue is going to be, but I think it is fair to assume that it can generate somewhere around the $500 to $520 a square foot, and it should be roughly 150,000 square feet left.

Okay.

The other thing that might be helpful to think about is the fact that that project has sold 46 new -- had 46 new sales, new orders this year.

Are you -- I know a lot of the mortgage, especially the jumbo mortgage fallout is brand new. Is there any sense as to with your preferred lender or just in terms of the spreads between conventional and jumbos that is occurring, what you're seeing from new traffic and what the contract holders might have in terms of rate shock that they probably weren't anticipating?

You mean at the Eclipse?

Just generally, the Eclipse is clearly your highest-priced project, so it's probably most impactful there.

In general it really depends on where you're talking about. In Raleigh we find that we're dealing with lower price products and the income potential there is lower, so they're not really -- they're not in the jumbo market typically. The higher priced -- interestingly enough in the Raleigh market, the higher identify priced products, Wakefield, for instance, which runs about $450,000 to $500,000, a lot of those guys are paying cash, and it is almost like it is a retirement community or a retirement home purchase. So they're not impacted by the mortgage market meltdown. In Atlanta, all of our projects, most of our projects I should say are in Forsyth County, where the average income is higher, and the buyers have more cash available, so we're not running into problems there either. In the Washington market, if the mortgage situation that's brewing out there continues to make problems, we could be impacted by people not being able to get the rates or get the products that they need to be able to buy some of the more expensive units at the Eclipse. That's why when I was talking I mentioned that we feel comfortable that we will be able to use -- to utilize buydowns if we need to as market conditions warrant to accommodate those kinds of situations.

Okay. And in terms of the debt curtailments, Bruce, you mentioned I guess $22 million still scheduled the remainder of this year. What do you have for the first six months of next year?

For debt curtailments?

Yes.

Yes, that's all going to depend on the sell-through of the inventory, Chris. I don't want to make a prediction for that. When you say we're ready to make or what's coming due?

Well, you made the comment that there were $22 million of curtailments for 2007 remaining.

Correct.

So what do you --

I misunderstood your question. I thought you were asking what we were going to be paying down.

No, no, I am talking about what the lenders -- what is expiring in the first six months of '08?

The biggest expiration comes from the Eclipse, which we think it will start to revolve itself. At this point we have roughly $125 million in next year that's been moved forward a significant part of it in the latter part of the year, I would say it starts in the May time frame, we have March, but predominantly in the moving to the second half of the year.

Okay. And then in terms of the -- you mentioned that the balance on the Eclipse at $57 million, is that correct?

Right.

When you talked about the A and the B tranche, can you walk me through --

That was at June 30th.

Right, right.

Right.

Can you walk me through how the tranches work their paydowns out?

Yes. First money goes to the A tranche, second money goes to the B tranche.

And the B tranche is how much?

Total?

Yes.

40 -- $42.5 million.

Okay. On the B tranche?

Right. So what we've been paying down during the course of third quarter has shirt actually paid off the A tranche, which is why we talk about their being milestones that is we achieve where we can rebalance the B into A rates.

Got you. Okay. So how does that work when you say rebalance? I mean is it --

There are a number of milestones in terms of square footage and outstanding balances and so forth, but net net when we reach a point which we think will be the end of this month, we can move whatever is in the B tranche to the A tranche. We have a one-time opportunity to reallocate to the lower cost tranche A. We expect to move all of the tranche B balance over.

When does the -- when do you -- what's the boggie to hit for the retail settlement to occur?

It is $200. There is a number of different things.

It is all about $30 million of loan balance in general.

So you think that there is an expectation to get thereby the end of this quarter or --

No. My guess is it will be early part of the fourth quarter, but we'll wait and see on that.

Okay. And then Chris, can you just provide a general overview of the sales environment in the Raleigh and Atlanta markets right now?

Well, it is difficult everywhere, which is why I was in my presentation I discussed the fact that our markets markets have weakened even further than they were at year end. The -- it is difficult to get a sale anywhere when you're dealing with people that have a home to sell. Inventories of the resale market -- of resale units are way up. Days on market, time to sell an existing house has gone up, so the -- in Raleigh we get a lot of people that don't have to sell a house, either they're the type of buyers I mentioned regarding the Wakefield community that are buying cash -- buying with cash or they're some of the lower-price the products where we sell to people that are perhaps buying their first house. Raleigh also gets a fair amount of people moving in from other markets, and which sometimes it means they don't have a house that they have to sell. Sometimes it doesn't.

Atlanta, the -- it is a tough market right now. Forsyth County where we have most of our projects is qualified borrowers. Most of them are in a situation where they have to sell a home, so that is impacting our ability to make deals in that market today. Nonetheless the Atlanta market also gets a lot of transplants coming into the area and again some of those people need to sell a home and some don't. And similarly in DC, I think the edge we have as strange as it may seem today, the edge we have in the DC market is that we have affordable condominiums. And the sheer nature of the fact that you can buy a unit for a monthly payment that is approximate to what your rent would be for a similar product entices people to come out and shop and to buy units. The Penderbrook project has sold relatively well this year. Had it not been that that project had started with 70, 80 sales a quarter, the eight to 10 that we're getting each month would not seem so dismal.

Also with the Eclipse, the -- it is still a great project. It is in a tremendous location. And there is continued interest in that property. There is not a lot of competition for it in that location. There is certainly other condominium projects similar in nature with -- throughout the Washington region, but there is none of them that are right across the street from National Airport and have the views these units have. So all in all it is still a buyers market in every place that we do business. We don't expect that to change over night, but we do think that we will be able to work through these market conditions and get to -- get back to the point where we're able to be in a more favorable environment.

And the the last question, on Barrington what's the status right now in terms of the rental and then what's your plan now at this point?

Right. It is currently -- we have two buildings that are built. Those two buildings as we said we are temporarily operating that project as a rental. There are 41 units constructed down there. There are three that are held off the market, and 30 are rented today. So there are about seven or eight that are available for rent. They continue to rent them there at a couple a week. We are getting ready to finish the next two buildings which we had suspended construction on. Those two also represent about 40 units, then we'll hold off. Once those are built, we will -- we are already renting into that third building, and then once that one is occupied we'll finish the fourth one. Each one has about $800,000 to $1 million left of work to be done, and then we'll hold off and assess the situation and decide whether it is time to start, either continue to sell that project as a rental, whether it is time to look to do our own internal conversion back to condominium there, or where the market is. And I guess that will be the January/February time frame when we're making that decision.

Okay. Great. Thank you very much, guys.

Thank you.

Thank you. The following request is from David Shapiro from Aegis Financial. Please go ahead.

Hello, guys.

How are you?

Question about Penderbrook. Where are the current -- what's the current status with the rentals and the NOIs and rental income on that property?

Sure. Just give me one second. We have 100 -- let's see -- there were 424 units there, 272 have settled. That's current information. There were 106 units available for rent. We have some inventory for sale. Of that 106, 97 are rented. It is generating roughly $122,000 per month in rental revenue, and let me see -- What's my NOI out there? Give me a second. I will pull that one up and come back to that.

Sure. And then on Barrington, you were saying 30 were rented, and what was the rental income and NOIs from that one?

Yes, that one, the rental income is about $45,000 monthly, and we're not -- there is NOI out there.

Okay. I wanted to talk a little about your spec inventory. You mentioned there were 270 units, and that was net of the Eclipse and net of Barrington. Is that correct?

Let me pull that up. Yes.

Okay. Specifically what asset value have you assigned to the spec inventory? And I assume that when you talk about the 270 units you're talking about that these are completed, 100% completed units or 65%?

65% of the entire spec inventory is substantially complete.

And the entire spec inventory was those 270 net units or just the completed number?

On everything. That includes -- I am sorry, on that 200 substantially complete would be on the entire inventory.

Okay.

Yes, the entire inventory.

Okay. And then what value do you attribute to the spec inventory?

That includes units at the Eclipse that you have there. I don't have an exact number to what I would allocate to the spec inventory. It is going to be roughly -- I would say it is about 100 -- including the Eclipse it is $100 million-ish.

Including the Eclipse?

Yes. It's not an -- I don't have an exact number.

Okay. And in regards maybe to your backlog units, or the construction for the backlog, is that substantially complete as well?

Some of it -- again, some of it is, and some of it is not.

Okay. Would you say that would be maybe in the the 65% range like the specs?

Of the backlog being completed?

Right.

Well, since so much of the backlog is Potomac yard, those are basically done. I'm going to say the June 30th backyard is so heavily weighted, that you would be in that even above 65% on the weighted average.

Okay. And then on your balance sheet, what do you have left in the deposit and evaluation costs categories?

I am sorry, deposit and valuation?

And preacquisition evaluation costs?

You mean --

For your land.

To buy land?

Right.

In other words, how many more deals might we walk away from and have to write off the front-end expenses.

That's right. I am trying to get the deposit exposure and the front end expense exposure there.

If you look on the balance sheet, inventory not owned is $35.5 million and obligations $33.5 million. The difference there is $2 million.

Right. And that's just on the -- that will represent --

That is deposits, that is at-risk deposits.

Okay. And then the evaluation costs?

Is about -- we're still carrying about $2 million to $3 million.

$2 million to $3 million there. Okay. And then when I take a look at your -- you still have Massey on the books, correct, you still have a whole bunch of lots on Massey?

We still have raw land at Massey, yes.

Okay, and what was sold was developed?

That's correct. There were two phases of Massey. There were 112 -- I believe it was 112 finished and 177 raw that are entitled but not developed.

Yes. And on the raw land, is that readily marketable if you had to tap it as a source of liquidity?

Yes.

Okay. And then in regards to some of the other raw land positions you have in Georgia, you have some very large positions here. I am just trying to get a sense if you have to tap liquidity from certain areas, which areas are the most likely areas that you tap and --

Right.

Well, I think you're asking a question, Chris, you're taking a different answer. If you were to tap liquidity, there are two ways of doing it, one, you sell assets. Second, you you look at where there is value where you could extract additional financing. So, Chris, what you're answering as if where is there value that is unleveraged, you're saying potentially down the road there is value unleveraged or underleveraged at Potomac yard. If you're looking at where do you off off load assets in order to create liquidity or reduction, I think the answer is it is scattered around the markets. There are probably kind of your eight positions for sale in each market. For instance, in Atlanta I think you brought up you can look at the triple road job as one place, Highland Station as a place where there is market marketability of land. In Atlanta you picked out there is marketability in the Massey lots. In Washington there is the East Capitol Street parcel, there's the Barrington depending on how you want us to look to sell it.

Okay. Very good.

I think a lot of our inventory has marketability. Whether or not in a fire sale you would recover as much as you want, that's not the right way to look at selling these assets. The right way do, it like Bellemeade, was you don't just dump it, you find the highest application for it.

Right. Moving on to your corporate end and the other expenses there. Outside of the sales from the Eclipse, it looks like you're running at a net income loss of several million dollars a quarter at least. I guess my question is, as we start to roll into next year and these Eclipse sales start rolling off and it is becoming more apparent, I think, to everyone that the market does not appear to be picking up in any meaningful way at least not right now and probably not for the next quarter or two, what's the strategy here? Maybe the market where you were trying to understand why the market is pricing your stock where it is, maybe they're concerned about the further deterioration of book value and how management is going to stem that. And I guess that also plays into my liquidity question that I previously asked about how management stems any book value degradation going forward?

There is going to be significant benefit from closing out of the Eclipse even though it does also mean you have less of that benefit going forward. So that will help liquidity in and of itself. The -- and we think we will be selling through that inventory well into next year. The market is unforgiving in terms of product that you bring to market on land that you bought a year ago. However, the opportunities that are beginning to take shape in markets like Washington are finished lot deals for prices that are significantly lower than what they were even as recently as last year. The -- and I believe that as this cycle continues on its normal course, we'll continue -- we will see continued reductions in the cost to produce homes and in the cost of the underlying land, which will position you to at least cover overhead in the nearer term and then return to profitability as pricing power reemerges. I don't think that's next year, but I think there is a way to get through this cycle with the reductions that we've put -- that we've taken already and the reductions that those are internal that I am referring to, and the reduction that is we are seeing in the production and land side of the equation as well.

So do I take that as a statement that management, outside of impairments, management's not ready to accept the $4 million to $5 million per quarter loss next year, and steps will be taken to stem that?

Absolutely. We're in the business to get through this and you have to live to fight another day. So at the appropriate times we're forced to make hard decisions all the time, so --

Well, keep in mind the Eclipse today is generating significant profitability. We've had episodes in the past where other projects were carrying the load before Eclipse was. I mean it's -- the nature of the business is as the next project comes online, it will step in. The Eclipse will generate positive book over the balance of the year, so if it is an erosion relative to today, you have to factor in the profitability generated from jobs like Cascades and Eclipse and [Summer Land] and other jobs in the shop, and I think as Chris said as we look ahead and see what needs to be done to keep the business at the right size, that's the action we'll take when it is appropriate.

Okay. Lastly, how does management feel about the value in the stock? I guess maybe the market has also been looking from -- for queues from management.

As I mentioned in my presentation, I think it is ridiculously undervalued. I think it is -- the valuation Comstock equity has is brought down in general by a general fear of the home-building sector in the markets, and there is only so much any one company can do about that. It will take time for the market to reassess its position regarding this sector, and -- but I have no doubt that that will happen.

Okay. Thank you.

Thank you.

Thank you. The following question is from Carter [Noble] from Scott & Stringfellow. Please go ahead.

Yes, I was wondering speaking of the stock price, is there anything in your loan agreements that you have with any of your lenders that would preclude using some money to buy stock back at this tremendous discount that it is trading at?

Yes, actually there is. We mentioned briefly in the Q, and it is I good question to bring up, in our senior unsecured notes there isn't a strict prohibition against it, but there is a term that requires us in the event of a buyback to match that amount of buyback in loan paydown, and right now that's an overwhelming impediment. I wouldn't necessarily call it a strict prohibition but for all intensive purposes it is prohibits us from buying back right now.

At the appropriate time when we feel more comfortable about the capital resources and availability of capital in the markets in general, I will seek an additional buyback authorization from the Board. Obviously there's no assurances that that will happen.

Did that sufficiently answer the question?

Yes. Thank you very much.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) The following question is from Michael [Prodding] with 10K Capital. Please go ahead.

Yes. Bruce, hi. I had just a couple of questions for you. I don't know if you covered this earlier, but would you expect to continue to be in compliance with the subordinated notes as of the end of September of this year?

As I said, that -- the covenant steps up in the third quarter. That question is hard to answer until we get further into the quarter and know really how much settlement raff you revenue we get from various projects as I said. It is an uncertain time, and it is very hard to look ahead and know exactly what income is generated. One of the benefits we have within that covenant particularly is that it is assessed on either a trailing four-quarter basis or on a one-quarter basis for the quarter in which you're doing the test. So we have two ways to make that covenant. We always are hopeful, and we always look to do what needs to be done to comply with those covenants, and so I -- we can't make any assurances, but we certainly are working day-to-day to try and make sure we do meet those covenants.

Okay. Terrific. On the M&T money, would you expect to continue to remain in come compliance with your covenant there is?

As I said, $120 million there is tight right now, but we have a very good relationship with M&T, and to the extent that I think we need -- we anticipate that that might be a problem, I have every confidence that they will work with us on that.

Okay. Great. And then it looks like aside from those two loans pretty much everything I believe aside from regions is being pushed out to at least March of next year, is that right?

Yes. There is still one or two project loans we're dealing with, but I would say the bulk of it, yes.

Okay. So on the regions, in the Q I think you said that those loans, some of those loans start maturing in December of '07.

We have a curtailment -- with regions, none of this is black and white. There is some inventory that we have committed to move by the end of the year or pay down the outstanding on it. It is not a maturity, but it is a commitment to reduce the outstanding uncertain speculative inventory at one project in Atlanta.

Okay. I've got you. And would you expect to be able to do that by December or --

We're in the process of doing it. I expect that our Atlanta division is working very hard. They know that that's an obligation of the company, and they're doing a good job down there getting rid of their spec inventory, and I think they're doing an excellent job on this project in particular.

Okay. Great. Thanks for taking my questions.

My pleasure.

Thank you. (OPERATOR INSTRUCTIONS) There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Clemente.

Thank you. Thank you for being here today. The -- I want the -- I just have a couple of comments before we go. These difficult market conditions have forced us to alter our growth strategy, obviously, but it is not dampened our spirit or our will to succeed and survive this market. In the two days -- in the two decades that we have been in the home-building business we have learned how to deal with these challenges and how to find opportunity in the natural cycles of our industry. The steps we have taken in the last 12 months are positively impacting results now, and will contribute to a solid foundation for improving results as market conditions allow. Job growth and population growth in each of our markets continues, which will eventually lead to increased demand. As this occurs we believe that Comstock will be poised to capitalize on the opportunities that present themselves as we have done in previous cycles. We will stay focused on the fundamentals, and we'll work diligently to position Comstock to benefit from improving market conditions and to create shareholder value in the process. Thank you for participating today. Good-bye.

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation, and have a great day.