While most midsized home builders have a tangible need for new capital to reload their operations, few are able to find good capital partners in today's market given all the uncertainties around buyer demand, land values, and even the balance sheet. But the odds of connecting with a capital source increase dramatically for those who have strong footholds in better markets, have a cash-flow friendly multifamily operation within their corporate umbrella; and have a squeaky clean balance sheet.
And that's just what Northern Virginia-based Comstock Homebuilding Cos. had to offer to Sunbridge Capital, a private investment firm funded by the Bainum family, a well known name in the Washington, D.C., metro market with connections to Choice Hotels International and ManorCare nursing homes. The two struck a two-part deal on July 13 that will give Comstock as much as $45 million to further stabilize the business while taking advantage of either for-sale or rental real estate opportunities in the metro Washington, D.C., market.
Rewind roughly three years, and the future of the company looked bleak. Its stock was threatening to be delisted from the NASDAQ stock exchange for noncompliance; its accounting firm was expressing concerns over its ability to stay in business; and the company had halted interest payments on some debt obligations. But in 2009, the company started its bounce back from the brink, launching its so-called "Strategic Realignment Plan." The plan helped reduce the company's debt load, cut costs, preserve cash, and shed non-core assets in markets like Atlanta and the Carolinas. According to a recent investor presentation, the plan has helped the company whittle down its debt from more than $340 million at its peak to less than $30 million in 2011.
Comstock CFO Joe Squeri said that the company's massive restructuring has created essentially a new entity that capitalizes on its talent and expertise in home building, apartment development and management, and real estate services with in the super concentrated geography of the D.C. market. This breadth of experience combined with a strong local market focus was attractive to Sunbridge, he said.
"They were buying into our strategy versus an asset class," he explained.
The first part of the agreement with Sunbridge is a $20 million debt deal, which Comstock management plans to use to refinance as many as two of the company's existing condo projects. Squeri said $13.7 million went to refinance its Eclipse project, a 465-unit condo project in the inner ring Virginia suburb of Arlington and that there's a commitment to also refinance debt on the company's Penderbrook community, another massive, 400+ unit condo conversion project in Loudoun County, Va. Squeri said that the refinancing will give provide the company with more working capital to help further its forward-looking business strategies.
But the more important part of the deal, said Squeri, is the up to $25 million in equity Sunbridge is willing to shell of for acquisitions of either multifamily rental or for-sale parcels. Squeri said the management team had no set timeline to add projects to its portfolio and would be evaluating opportunities as they came. In addition to its Eclipse and Penderbrook projects, the company currently has stakes in three other communities in and around Washington, D.C.--Cascades in Loudoun County, Hampshires in Northeast D.C., and Cedar Hill in Southeast D.C.
Tony McGill, Managing Director of Advisory and Capital Markets at Zelman, which acted as joint-lead placement agent on the deal, said that it also signals a notable shift in the private capital markets, which "for a number of years now have had very limited appetite for this type of transaction." However, he said, this transaction also signifies a clear expression of Sunbridge's view of the future, both from a macroeconomic and housing industry standpoint, supported by the strength and vitality of the D.C. housing market, and the capability and strategic vision of the Comstock management team.
"This transaction allows Comstock to focus all eyes on the future, and on generating significant long-term value for its shareholders," McGill said of the deal.