Comstock Holding Companies Inc (CHCI) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen. My name is Melanie and I'll be your conference coordinator for today's call. I'd like to welcome everyone to Comstock Homebuilding Companies, Inc. first quarter 2008 earnings conference call. Throughout the duration of this presentation today, all audio participants will remain in a listen-only mode 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 27ai1 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. This forward-looking statements are based largely on this company's expectations and subject to a number of risks and uncertainties, some of which can not be predicted or quantified and are beyond their control. Future developments and results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. In light of the 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 stockholders. 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. This is Chris Clemente, Chairman and CEO of Comstock Homebuilding Companies. Thank you for joining us today. With me is Bruce Labovitz, our CFO. After I review the progress we have made repositioning Comstock, Bruce will provide a detailed review of the financial results of the quarter and then we will open the call to questions.

Once again, I would like to start by thanking every member of the Comstock team for their continued dedication and perseverance. Market conditions for the past couple years have created significant challenges for Comstock and I'm proud of our team's ability to meet those challenges. As previously discussed in this forum, we spent much of the past 1.5 years focused on enhancing our balance sheet while positioning Comstock to survive this downturn and emerge stronger than before. We have accomplished much in this regard and continue to make progress on many fronts. Since the beginning of last year, we have reduced our total debt from approximately $295 million to approximately $158 million as of April 30th, and reduced the total amount of debt maturing within 12 months from approximately $205 million in January of 2007 to approximately $66 million today. In the process, we have reduced our debt service burden from approximately $2.2 million per month in early 2007 to just over $900,000 per month currently. Furthermore, by temporarily positioning 214 condominiums as rental units, we are currently generating approximately $165,000 per month of rental revenue, net of operating expenses on those projects which we use to offset debt service.

We have also reduced near term capital requirements associated with planned land purchase obligations from approximately $70 million at the beginning of last year to almost nothing today. In the same time period, we have reduced our overall inventory of owned and contracted land from more than 4,700 lots to approximately 2,000 lots. We have reduced the number of completed spec units held per sale from approximately 677 units at the beginning of 2007 to 179 units today. This does not include the units that we hold as rental units. We have reduced our annual operating costs from approximately $37.5 million at the beginning of last year to just over $18 million today, in part through staff reductions of more than 50%. Several steps have also been taken to reduce future operating expenses, including the acceleration of certain noncash compensation expenses into 2007. During this period, we have also negotiated reductions in construction and development contracts that will enable us to produce houses for as much as 25% less than previously.

During 2007, we sold several assets strategically to ensure we maximized our 2007 tax refunds, which generated almost $14 million of new capital for our company during the first quarter of this year. We also exited certain markets last year and extracted ourselves from a unprofitable joint venture in North Carolina, which was our only joint venture. We obtained approximately $40 million of new project financing earlier this year, which has allowed us to refinance the Eclipse project and generate additional working capital. This new loan has a maturity three years from now. We finalized multiple loan modifications with several lenders that addressed various loan covenants, maturity dates, curtailment schedules and other loan terms to bring our borrowing facilities more in line with current market conditions.

Among the most important achievements during the last 1.5 years was the restructuring of the $30 million senior unsecured debt with JPMorgan Ventures. In the process, we reduced the total loan amount by $21 million, including the elimination of $15 million of the original debt, and we established an interest reserve that provides debt service funding on the remaining $9 million obligation for much of 2008. Along the way, we have regularly examined the recoverability of our investment in each asset, and as warranted, adjusted our book. Currently we believe that the value of our assets is accurately reflected and we will continue to monitor this closely.

While we diligently pursued improving the financial position, we have also focused on operational enhancements we believe will improve our production efficiencies, our customer service ratings, and our ability to increase sales. The steps we have taken since this cyclical downturn began helped stabilize our company, and I'm pleased with the progress we made so far. However, there is still much to do. As stated in our press release yesterday, market conditions continue to create significant challenges for our industry and for our company. We believe the results of this quarter indicate that we are headed in the right direction and that our efforts are beginning to have a positive impact on our results, but we cannot rest until we have restored this company's ability to produce dependable earnings.

Demand continues to be soft, and high levels of available inventory of existing homes continue to make it difficult to meet sales and settlement objectives. Additionally, the increasing number of homes that are going through the process of foreclosure and the attention this draws will negatively impact builders' ability to move product until this phenomenon runs its course. Although news reports indicate that Congress is working on a housing stimulus package, unless it includes a direct benefit to purchasers of new homes, it's not likely to have a positive effect on demand.

It is also worth noting that turmoil in the banking industry could negatively impact our ability to reach agreement with certain of our lenders regarding loan modifications needed to address covenant compliance and or loan maturities. We continue to work closely with our various lenders in a effort to develop solutions that work for all parties. To date, with the exception of the lender to the Mathis Partnership in Atlanta, we have found our lenders to be generally reasonable and rational. However, the depth of the downturn and the generally held expectations for the timing of the market recovery make it necessary to continue the process of seeking loan modifications and extensions.

Nonetheless, I remain confident that the market will recover as it has in every previous cycle. I'm also confident that our reduced operating costs and lower construction costs coupled with our remaining land position and emerging opportunities to purchase new land on improved terms will enhance Comstock's ability to produce positive results when demand returns to normal levels. I'm going to ask Bruce to discuss the financial results for the quarter in detail, and after that we will open the call to questions.

Thanks, Chris. I'm joined today by Jeff Dauer, our Chief Accounting Officer. Yesterday we filed our Form 10-Q for the three months ended March 31, 2008. We reported a net profit of $6.5 million on revenue of $16.4 million, with revenue from homebuilding of $15.9 million, and other revenue just above $400,000. While this represents a 63% or $30.3 million decrease in total revenue as compared to Q1 2007, it represents an increase of $8.2 million in net income as compared to a Q1 2007 net loss of $1.7 million.

Gross margin for the quarter was 14.7% as compared to 14.3% for Q1 2007, with gross margin from homebuilding of 12.6% compared to 13.3% for Q1 '07. Gross margins were strongest in Raleigh, led by Allyn's Landing, 47%. Haddon Hall, 27%. And Holland Road, 23%. At the Eclipse, where we recorded $4.4 million of revenue on nine settlements at a average of $494.50 per square foot, gross margin was approximately 8% during the quarter, before recognizing $1 million in deposit forfeitures. Inclusive of deposit forfeitures, the gross margin would have been 31%. Gross margin at the Eclipse was compressed this quarter as a result of the refinance of the project to extract capital for the restructuring of the unsecured debt and for general working capital purposes. So far this quarter, we've settled an additional three units at the Eclipse for $1.2 million in revenue. As of today, there are 115 unsold units, totaling 121,650 unsold square feet. Our current list prices for the remaining units average $537 per square foot or $65.3 million of gross revenue value.

Based on the underlying cost per square foot implied by this quarter's 8% gross margin, future profit to be derived from the Eclipse after 7% direct cost of sales would be just over $5 million. The current cost based value of the remaining inventory at the Eclipse is $50.8 million and the current outstanding balance under the KeyBanc facility is $37.6 million. As part of the closing process for the first quarter, we once again reviewed the portfolio for impairments, and elected to record $800,000 of charges related to two projects. At Falling Water in Atlanta, we elected to record a $300,000 charge based on continued pricing weakness. At Gates at Luberon, we elected to record $500,000, based on potential losses which could occur in connection with the Haven Trust loan. Other than those two projects, we are projecting positive gross margins in the future, and as such did not conclude that impairments were necessary at this time.

SG&A for the quarter was down $3.7 million to $4.5 million. This 45% reduction in SG&A as compared to Q1 2007 is the result of our rightsizing staffing levels and general cost reduction initiatives that reflect difficult decisions we have made over the past year. In Q1 2008, selling expenses represented $1.3 million or 28% of SG&A, with G&A accounting for $3.2 million. In Q1 '07, selling expenses represented $2.6 million or 32% of the $8.2 million of SG&A. Selling expenses are down due in part to both lower commission expenses as a result of lower settlement volume and reductions in advertising expenditures throughout our markets. G&A is down principally as a result of the deep staffing cuts Chris mentioned earlier, and the acceleration of noncash compensation charges into Q4 of last year.

In connection with the current slowdown in housing, we are beginning to classify more jobs as inactive with respect to interest capitalization. As this occurs, more interest will be expensed as G&A costs in the period in which it's incurred, as opposed to being capitalized and expensed as cost of goods sold on a pro rata basis over the units as they settle. In the first quarter, we expensed $600,000 of interest that would have otherwise been capitalized. While this change in accounting will decrease current period operating margins, it will increase future gross margins and will alleviate some of the pressure to impair assets. As we've mentioned before, during the first quarter, we closed on the restructuring of the $30 million senior unsecured notes. At closing, we paid $6 million to JPMorgan Ventures, and entered into an amended and restated note for $9 million with a five year term. We also issued a seven year warrant to buy 1.5 million shares of our Class A common stock at $0.70 per share.

In connection with this restructuring, and in accordance with FAS 15, we recorded a current period gain of $8.3 million and deferred $4.4 million of gain to future periods. The deferred gain was recorded as additional outstanding indebtedness under the note. In future quarters, we will recognize the residual $4.4 million gain as we make interest payments, reducing the outstanding amount due under the note as opposed to recording interest expense. Another benefit of the restructuring, as Chris mentioned, is that we were able to release the $866,000 of cash held in a interest escrow as a prepayment of interest for the remainder of the year.

As you may recall, in December 2007, we established a $29 million valuation allowance against our deferred tax asset. In spite of having had taxable income in the Q1, we continue to forecast a cumulative tax loss for 2008 based on current year recognition of prior year impairment related tax deductions. Because we are forecasting a tax loss, our effective rate for the first quarter was zero. If our estimates don't change, we will continue to utilize a 0% tax rate for the remainder of the year.

As for the balance sheet, total debt net of deferred gain was reduced by $12.9 million to $158 million or a 7.5% decrease as compared to December 31st, 2007. At the end of 2007, we had approximately $115 million of cash events, either curtailments or maturities, scheduled to occur during the calendar year. By the time the audit was completed, it was down to around $70 million. This volume of debt related obligations was the primary basis for PWC's going concern opinion. As of last week, we had reduced current year obligations to approximately $65 million, with more than $52 million of that balance owed to three banks: BB&T, M&T, and B of A. While we believe this reduction in debt is a significant accomplishment, the carried cost is still the biggest threat we face. It will be imperative that we continue to succeed in negotiating with our banks to secure extended maturities, waivers of curtailments, and additional interest reserves. We are working closely every day with our with lenders to better align our debts with current market conditions.

In an effort to minimize our cash cost of interest, we are temporarily operating certain multifamily assets as rentals. At Penderbrook, we have 124 remaining units, of which 109 are available for rent and 107 are rented. These units are generating approximately $130,000 per month in gross rental revenue and approximately $100,000 of NOI for debt service. At Barrington Park, we have 65 units completed out of 148, with 62 of them available for rent and 40 of those units currently rented. These rented units are generating approximately $58,000 per month in gross rental revenue and approximately $37,000 per month of NOI for debt service. At the Eclipse, we have recently made 39 units available for rent with 20 of them currently rented. The rented units will generate approximately $37,000 per month in gross rental revenue, and approximately $27,000 per month of NOI for debt service. All told, this represents approximately $164,000 a month, or close to $2 million per year of cash from inventory for debt service. In Atlanta, we continue to work through the bankruptcy process on the Gates at Luberon project. Haven Trust has filed a suit against Comstock on the guarantee, but we continue to believe that the reorganization process will afford us the time we need to work out the project and be in a position to satisfy the obligation.

Book value at March 31, 2008 is $53.9 million or $3.02 per share on 17.9 million shares outstanding. Obviously, we're trading at a significant discount to book. At this time, we are carrying $203.5 million of inventory at impaired historical costs. Book value of strictly the real estate assets, net of secured and unsecured debt associated with it, is $45 million or $2.52 per share. We believe that given time, our assets have cash revenue value in excess of the current carry value of the inventory, and as such believe that even after factoring in the carry cost acquired to achieve that future revenue, there is in time residual cash value in our real estate assets in excess of their current book value.

Lastly, we are still in the probation period with NASDAQ regarding the notice of noncompliance we received earlier this year. We have until July 7th, 2008 for the closing bid price of our stock to close above $1 for ten consecutive days before we receive a formal notice of delisting from the global market. If we receive the delisting notice, we will have seven days to request an appeal hearing, which is typically scheduled within four to six weeks. During the appeal period, the delisting is stayed. At the hearing, we will have the opportunity to present a plan for restoring compliance of our stock. If the plan we present is accepted, we will be afforded additional time to effect the plan.

At this time I'm going to turn the call over the the operator to take questions and then will turn the call over the Chris for closing comments.

(OPERATOR INSTRUCTIONS) The first question is from Chris Lucas of Robert Baird. Please go ahead.

This is David [Binski] here for Chris.

Hi, how are you doing?

Good. I got a couple of questions. You guys talked about the project loans that have matured and about to mature, but what happens if the banks are unwilling to extend maturities?

Well, then in our business you work very hard to make sure that doesn't happen. Essentially that's what Haven Trust did. They were unwilling to extend the loan and unwilling to negotiate terms for an agreement that made sense. Like I said in my presentation, we have in large part we have worked closely and been pleased with the responses we have gotten from every one of our lenders, but the dialogue continues. And although it does continue, it's a lot better than it was a year ago. I think the fact that we have been able to reduce the upcoming maturities all the way from almost $300 million to just over $60 million is indicative of the working relationship we have with the vast majority of our lenders.

The question is also if -- what if the banks decide they don't want to extend, what is the impact on the banks? Then they have to decide what they want to do with the assets. So far through this cycle, what we've found is that the banks at this point, given the reserve requirements created by ownership of real estate and debts that are nonperforming, it's expensive to them. And they found it less expensive to work with the builders than to not extend. It's just a dance of who gets what in the negotiation.

I noticed there was a SG&A savings of about $1.4 million during the quarter. Is is that a one time charge?

Yes.

Okay. Is there, what do you think is a good run rate for SG&A going forward?

We are hoping to see the run rate be somewhere in the $5 million a quarter range, or lower. One of the wild cards, as I mentioned, will be as we start to designate properties as inactive, which is unpredictable at the moment. It will start to see additional SG&A charge by virtue of the direct expensing of real estate taxes, and so while I think we can come in on a normalized level in the $18 million to $20 million sort of range, I think there will be some additional SG&A related to these current period expenses.

As for the impairments at the Gates at Luberon and Falling Water, how does the carrying value of those properties compare to the balance on the project loans outstanding?

At the Gates at Luberon right now, the carry value is below the debt outstanding. And at Falling Water it's part of the borrowing base with Wachovia, so there is not a direct individual project loan associated with it.

Okay. Then lastly, there is about $1 million in revenues from forfeited deposits. What is the history of retaining the deposits to date?

We have been very successful in retaining deposits to date. We go through the process of informing the contract buyer that they are in violation of their contract for having defaulted, and have been aggressive about retaining deposits.

Should we expect forfeitures at this level in future quarters?

No, I think we're starting to come to the tail end of that. There is about $1 million left outstanding, but I don't expect we will see it all in one quarter. We expect it will trickle in. It's based on when the contract went in to default, so I think you will see it trickle in over the year.

Okay. That's all I got, thanks guys.

(OPERATOR INSTRUCTIONS) The following question is from David Shapiro of Aegis Financial.

Just wanted to go over your spec inventory rack up outside of Penderbrook, Barrington,and the Eclipse. Can you give a brief unit rack up outside of those three projects?

Are you interested in the types of product or?

Right. I mean basically how many single family homes in Atlanta and the other major Raleigh projects.

In Atlanta, we have a total of 11 specs, four of which are held at foundation only. Seven of which are --

It's 16. Four held at foundation.

Four held at foundation. One is under construction and 11 are completed. That's right.

That's helpful.

In Raleigh, there are 21 units, spec units.

That 11 is over seven different communities.

Right. In Raleigh there are 21 specs. 13 of them are condominiums in one project acquired in the Capital Homes acquisition. The rest of them are either single family or towns.

There's eight finished over five communities.

In DC, the majority of them of course are at the Eclipse. We have 74 finished with the Eclipse that are in the for sale pool. We have 22 at Belmont Bay. We have -- hold on a second, I got to line this up. Ten at Penderbrook, 14 at Summerland, and five at Cascades for a total of 125. Those are completed. We also have 28 that are held at foundation.

19 noncondo. The balance is condo.

That's helpful. The asset value on the Eclipse currently?

$50.8 million.

$50.8 million?

Yes.

Okay. Then I'm guessing that when we take a look at the inventory value, it remained flat versus year end, even though you probably had about a $15 million drawdown worth of sales and just a little bit of impairments. Was this a typical seasonal build? It seemed fairly large given the fact you are trying to unwind here?

You're building through your backlog. You are going to see backlog construction progress over the course of the quarter.

Would you expect more cash to be coming out as we move forward through the year? Was that your heaviest build period?

We hope it won't be. We hope there will be huge backlog for a second half of the year to build. But if there isn't, you will start to see that unwind.

Then the restricted cash balance, what's exactly? I know there is about $1 million in legal reserve, what is the remaining amount in there related to? Is that related to the debt -- the secured debt?

You have deposits, customer deposits and the $3 million insurance letter of credit that is --

Security.

Security against a letter of credit for a self insurance program on our liability.

Okay. That's helpful. Then on your construction category, if we look at the inventory category, you break it down in to the construction and land category. How much would you estimate-- how much of the land is associated with the construction bucket? If we were to add the value of the land underneath that total construction bucket?

Of the $86 million of land, how much is under the construction?

Yes. Exactly.

Nothing included in the $116 million of construction. All the land is held separately. I don't know exactly what that allocation would be under the land. I would suggest it's probably a third.

A third of?

The $86 million.

Okay. All right. Thank you.

You're welcome.

Thank you.

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

Thank you. I want the market to know that the Comstock team remains committed to taking all necessary steps to survive the balance of this downturn and to emerge a stronger company. We will continue to focus on the fundamentals of our business while exploring all options for increasing shareholder value in the short-term and long-term. In keeping with our entrepreneurial spirit and background, we will remain open minded and will not rule out any approach that we believe will enhance shareholder value. We believe the results of this quarter indicate that we are headed in the right direction and that our efforts are beginning to have a positive impact on our results. I look forward to reporting to you regarding additional progress in future periods. Thank you for participating today.

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.