Hi Brian, great article - thanks for the write up! Comstock filed a 15-12G to suspend periodic reports (quarterly/annual filings) today. Do you or anyone have opinions into why they would do that? Thanks!
The termination agreement of the asset management agreement, in my opinion, serves as a very valuable protection to the downside on the value of this business. That being said, given the related party transactions here, is there anything that would prevent CP to amend the agreement to eliminate and/or severely restrict the financial consequences of a termination? There's no specific language that I can come across that speaks to the inability for CP to amend the AMA in their favor.
Realistically, given CP's high ownership stake and control, they could likely amend the Asset Management Agreement (AMA) in a way that reduces or eliminates the financial consequences of termination. However, historically, every amendment to the agreement has been in CHCI’s favor.
For example, a recent amendment introduced a lease break fee payment agreement, ensuring that CHCI gets compensated if a lease is terminated early. This suggests that management sees value in protecting and enhancing CHCI’s revenue streams rather than weakening them.
Additionally, it’s important to consider that any amendment restricting the financial protections of CHCI would, in effect, be a case of moving money from one vehicle to another, rather than outright benefiting CP at CHCI’s expense. Given their significant ownership in both, there’s little incentive to undermine CHCI’s value.
So while there's probably no hard restriction preventing CP from amending the agreement, the trend thus far indicates that management is aligned with preserving and strengthening CHCI’s role as the asset manager.
Thanks for your reply. I'm generally inclined to agree with you - I think there's also a material reputational risk to doing so for the insiders as well.
Do you have any insights on the pipeline beyond the anchor portfolio? These assets took decades to get to the point where they're developable. It'll be challenging presumably for CHCI to manage anything of a similar scale, whether for the partners or for a third party developer, in the immediate or medium term.
Great points, and I completely agree—there’s a significant reputational risk for insiders if they were to go down that path.
Luckily, given today’s valuation and existing pipeline, CHCI doesn’t need additional projects for this to be a compelling opportunity.
That said, I think the broader vision is to use these assets to build a respected brand, reputation, and operational platform that will position them to win third-party management and development opportunities in the future.
The assets they already own should serve as a proof of concept, demonstrating their ability to execute and making it easier for them to attract new business over time.
Hey Brian, thanks for the write up, really interesting company and management!
One question: I see TTM FCF as ~ $12m, but looking at the first nine months of '24 I see FCF more like $2.6m. It looks like Q4 '22 and '23 were much larger than other quarters. Is that a function of the timing of their fees? Any thoughts on FCF going forward?
The core management fee business is steady and stable, so any large variations in FCF are due to the incentive payments they receive in select quarters. These haven't occurred this year, which explains the lower FCF in the first nine months of 2024.
That said, in my analysis, I don’t count on incentive fees going forward and instead focus solely on the core recurring business, which I estimate at a $5.5 million earnings base in recurring earnings, before any buildout-related growth.
Hi Brian - It seems annual market rent for the managed portfolio is about ~$30/sqft per year based on looking online at some of these properties, so how is it that CHCI earns fees of ~$10/sqft for an implied fee yield of over 30%?
For instance in 2023, CHCI earned about $40M in asset + property mgmt fees on about 3.8M of managed square feet. I'm trying to bridge the disclosed 3.5% all-in fees of Anchor portfolio revenue.
Also, how do you think about incremental investments on RE ventures? How much spend/year is a reasonable expectation and what are the returns that could be expected from that? Historically, seems like a poor use of capital. For instance, their investment in The Hartford is marked at $610M per latest 10-K, but they only received fee revenue of about $0.9M, hardly seems like a good use of capital.
Thank you for the questions! I’ll answer them one at a time.
1. Why does CHCI’s fee revenue appear higher than 3.5% of rent revenue?
The key reason is that reimbursements are counted as revenue, but CHCI doesn’t take a fee on reimbursed revenue. This creates a discrepancy between reported revenue and the stated fee percentage. However, if you look at actual earnings rather than just revenue, everything reconciles and makes sense.
As stated in the 10-K:
"The revenue for these services is presented gross for any services provided by the Company’s employees…"
Essentially, CHCI books reimbursed expenses as revenue when its employees provide services, even though these costs are just pass-throughs. Since no fee is taken on these reimbursements, reported revenue appears inflated relative to the fee percentage.
2. Clarification on The Hartford Investment
The investment in The Hartford is $610,000, not $610 million (the table is presented in thousands). Since CHCI earned $900,000 in fee revenue from The Hartford, it actually ends up looking like a strong return.
Thanks Brian! Appreciate the clarification, but I still am not able to get to their 3.5% fee rate.
If I assume management rev is $39M in 2024, and net out RE ventures rev of $3M, I get to $36M for the Anchor properties.
Applying their 20% EBIT margin is about $7.2M in profit. On the ~3.2M of managed sqft excluding the RE ventures, that comes out to ~$2.25/sqft of annual earnings. If the Anchor properties have revenue of ~$30/sqft per year, I still get to almost 7.5% implied fee percentage.
On the other hand, the 10-K states the RE ventures had revenue of $24.9M and fees of $3.3M. Applying CHCI's 20% margin gets to ~2.65% fee rate which makes sense.
I probably am doing something wrong here, but curious to get your thoughts.
If you take your $30 per square foot estimate and multiply it by the 3.8 million square feet in the managed portfolio for full-year 2023, you get approximately $114 million in revenue for the Anchor properties.
At a 3.5% fee rate, that equates to about $4 million in earnings. Adding the $4.8 million in incentive fees, we get to $8.8 million in total earnings, which aligns closely with what's reported.
Hi Brian, great article - thanks for the write up! Comstock filed a 15-12G to suspend periodic reports (quarterly/annual filings) today. Do you or anyone have opinions into why they would do that? Thanks!
Great writeup.
The termination agreement of the asset management agreement, in my opinion, serves as a very valuable protection to the downside on the value of this business. That being said, given the related party transactions here, is there anything that would prevent CP to amend the agreement to eliminate and/or severely restrict the financial consequences of a termination? There's no specific language that I can come across that speaks to the inability for CP to amend the AMA in their favor.
AC, thanks for the kind words and great question!
Realistically, given CP's high ownership stake and control, they could likely amend the Asset Management Agreement (AMA) in a way that reduces or eliminates the financial consequences of termination. However, historically, every amendment to the agreement has been in CHCI’s favor.
For example, a recent amendment introduced a lease break fee payment agreement, ensuring that CHCI gets compensated if a lease is terminated early. This suggests that management sees value in protecting and enhancing CHCI’s revenue streams rather than weakening them.
Additionally, it’s important to consider that any amendment restricting the financial protections of CHCI would, in effect, be a case of moving money from one vehicle to another, rather than outright benefiting CP at CHCI’s expense. Given their significant ownership in both, there’s little incentive to undermine CHCI’s value.
So while there's probably no hard restriction preventing CP from amending the agreement, the trend thus far indicates that management is aligned with preserving and strengthening CHCI’s role as the asset manager.
Thanks for your reply. I'm generally inclined to agree with you - I think there's also a material reputational risk to doing so for the insiders as well.
Do you have any insights on the pipeline beyond the anchor portfolio? These assets took decades to get to the point where they're developable. It'll be challenging presumably for CHCI to manage anything of a similar scale, whether for the partners or for a third party developer, in the immediate or medium term.
Great points, and I completely agree—there’s a significant reputational risk for insiders if they were to go down that path.
Luckily, given today’s valuation and existing pipeline, CHCI doesn’t need additional projects for this to be a compelling opportunity.
That said, I think the broader vision is to use these assets to build a respected brand, reputation, and operational platform that will position them to win third-party management and development opportunities in the future.
The assets they already own should serve as a proof of concept, demonstrating their ability to execute and making it easier for them to attract new business over time.
Hey Brian, thanks for the write up, really interesting company and management!
One question: I see TTM FCF as ~ $12m, but looking at the first nine months of '24 I see FCF more like $2.6m. It looks like Q4 '22 and '23 were much larger than other quarters. Is that a function of the timing of their fees? Any thoughts on FCF going forward?
Hey JK, thank you, and great question!
The core management fee business is steady and stable, so any large variations in FCF are due to the incentive payments they receive in select quarters. These haven't occurred this year, which explains the lower FCF in the first nine months of 2024.
That said, in my analysis, I don’t count on incentive fees going forward and instead focus solely on the core recurring business, which I estimate at a $5.5 million earnings base in recurring earnings, before any buildout-related growth.
Looks very interesting. Thanks for sharing!
Hi Brian - It seems annual market rent for the managed portfolio is about ~$30/sqft per year based on looking online at some of these properties, so how is it that CHCI earns fees of ~$10/sqft for an implied fee yield of over 30%?
For instance in 2023, CHCI earned about $40M in asset + property mgmt fees on about 3.8M of managed square feet. I'm trying to bridge the disclosed 3.5% all-in fees of Anchor portfolio revenue.
Also, how do you think about incremental investments on RE ventures? How much spend/year is a reasonable expectation and what are the returns that could be expected from that? Historically, seems like a poor use of capital. For instance, their investment in The Hartford is marked at $610M per latest 10-K, but they only received fee revenue of about $0.9M, hardly seems like a good use of capital.
Thank you for the questions! I’ll answer them one at a time.
1. Why does CHCI’s fee revenue appear higher than 3.5% of rent revenue?
The key reason is that reimbursements are counted as revenue, but CHCI doesn’t take a fee on reimbursed revenue. This creates a discrepancy between reported revenue and the stated fee percentage. However, if you look at actual earnings rather than just revenue, everything reconciles and makes sense.
As stated in the 10-K:
"The revenue for these services is presented gross for any services provided by the Company’s employees…"
Essentially, CHCI books reimbursed expenses as revenue when its employees provide services, even though these costs are just pass-throughs. Since no fee is taken on these reimbursements, reported revenue appears inflated relative to the fee percentage.
2. Clarification on The Hartford Investment
The investment in The Hartford is $610,000, not $610 million (the table is presented in thousands). Since CHCI earned $900,000 in fee revenue from The Hartford, it actually ends up looking like a strong return.
Let me know if you have any other questions !
Thanks Brian! Appreciate the clarification, but I still am not able to get to their 3.5% fee rate.
If I assume management rev is $39M in 2024, and net out RE ventures rev of $3M, I get to $36M for the Anchor properties.
Applying their 20% EBIT margin is about $7.2M in profit. On the ~3.2M of managed sqft excluding the RE ventures, that comes out to ~$2.25/sqft of annual earnings. If the Anchor properties have revenue of ~$30/sqft per year, I still get to almost 7.5% implied fee percentage.
On the other hand, the 10-K states the RE ventures had revenue of $24.9M and fees of $3.3M. Applying CHCI's 20% margin gets to ~2.65% fee rate which makes sense.
I probably am doing something wrong here, but curious to get your thoughts.
No problem!
If you take your $30 per square foot estimate and multiply it by the 3.8 million square feet in the managed portfolio for full-year 2023, you get approximately $114 million in revenue for the Anchor properties.
At a 3.5% fee rate, that equates to about $4 million in earnings. Adding the $4.8 million in incentive fees, we get to $8.8 million in total earnings, which aligns closely with what's reported.
Let me know if that helps clarify!
Makes sense thanks for all the clarifications and for the write up :)