AMREP Corporation Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended October 31, 2019, representing fiscal 2020 Q2. The filing was signed December 10, 2019. AMREP operates primarily in one segment: real estate, with land sales concentrated in New Mexico. Its fulfillment services business was sold on April 26, 2019 and is presented as discontinued operations.
Financial Highlights
| Metric | Three months ended October 31, 2019 | Three months ended October 31, 2018 | Six months ended October 31, 2019 | Six months ended October 31, 2018 |
|---|---|---|---|---|
| Revenue | $4.0 million | $2.6 million | $8.7 million | $6.9 million |
| Operating loss from continuing operations | $(2.9) million | $(0.8) million | $(3.4) million | $(1.7) million |
| Loss from continuing operations | $(2.2) million | $(0.6) million | $(2.4) million | $(1.2) million |
| Net income/(loss) | $(2.2) million | $0.1 million | $(2.4) million | $0.1 million |
| Net income/(loss) per diluted share | $(0.27) | $0.00 | $(0.29) | $0.01 |
- Revenue mix: Land sales were $3.4 million in Q2 and $7.8 million year to date, compared with $2.4 million and $6.5 million, respectively, in the prior-year periods. Rental income contributed $341,000 in Q2 and $682,000 year to date; there was no comparable prior-year rental revenue.
- Land-sale performance: New Mexico land-sale gross profit before indirect costs was 19% in Q2 and 18% year to date, versus 9% and 10% in the prior-year periods. Management attributed the improvement to builder demand and higher revenue per developed lot.
- Unusual expense: A $2.9 million non-cash pension settlement charge was recorded in Q2 and year to date after the pension plan paid $7.3 million in lump-sum benefits to 309 former employees.
- Cash flow: Net cash used in operating activities was $520,000 for the first six months, an improvement from $2.5 million used by continuing operations in the prior-year period. Total cash flow also reflected $3.6 million of voluntary pension contributions.
- Investing: Capital expenditures were $26,000 year to date, primarily for computer equipment.
- Debt and liquidity: Cash and cash equivalents were $12.6 million at October 31, 2019, with an additional $305,000 of restricted cash. Notes payable, net declined to $574,000 from $1.3 million at April 30, 2019. The remaining loan had $583,000 of principal outstanding, was secured by property with a $1.4 million book value, and carried a stated interest rate of approximately 5%.
- Balance sheet: Real estate inventory was $54.2 million, investment assets were $17.0 million, total assets were $95.6 million, and shareholders’ equity was $89.8 million at October 31, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue increased approximately 51% in Q2 and 27% year to date, primarily from higher residential land sales and newly established rental income.
- Despite higher revenue and improved land-sale margins, the company moved from modest profitability to a net loss because of the $2.9 million pension settlement charge and higher real estate operating expenses.
- Prior-year results included $635,000 of Q2 and $1.4 million of year-to-date income from discontinued fulfillment operations; no such income was recorded in 2019.
- Real estate operating expenses increased to $443,000 in Q2 and $1.0 million year to date, reflecting higher bonuses, allocated employee costs, real estate taxes, and healthcare costs.
- Corporate general and administrative expense declined to $590,000 in Q2 and $1.5 million year to date, primarily due to lower headcount, travel, legal expense, and reallocation of employee costs.
- The company made a $3.6 million voluntary pension contribution, reducing accrued pension costs from $6.4 million at April 30, 2019 to $2.7 million at October 31, 2019.
- The company adopted new lease accounting requirements effective May 1, 2019. Management stated that adoption did not materially affect the consolidated financial statements.
Outlook, Risks, and Unusual Items
- Management did not provide quantitative revenue, earnings, or margin guidance.
- Land-sale revenue, pricing, and gross profit can vary significantly by period based on transaction timing, property type, and location; prior results may not indicate future performance.
- Liquidity depends on operating cash flow, bank financing for real estate projects, and existing cash balances. Availability and utilization of bank financing are identified as forward-looking matters.
- The company’s remaining real estate loan was subject to financial covenants, and management stated that the company was in compliance at October 31, 2019.
- The pension settlement charge was non-cash, but pension funding and lump-sum benefit obligations remain important financial considerations. The company stated that the $3.6 million contribution eliminated the need to satisfy a previously accelerated $5.2 million funding obligation over seven years beginning in fiscal 2021.
- Forward-looking results are subject to real estate market conditions, economic conditions, financing availability, project execution, accounting estimates, and other factors beyond management’s control.
- Management concluded that disclosure controls and procedures were effective and reported no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the sustainability of increased builder demand, higher developed-lot pricing, and the reported 18% to 19% land-sale gross margins.
- Assess the timing and pipeline of future New Mexico land sales, including developed versus undeveloped acreage.
- Review cash generation after pension contributions, real estate development spending, and debt repayments.
- Confirm the terms, maturity, collateral, covenants, and refinancing requirements of the remaining real estate loan.
- Evaluate the company’s remaining pension obligations and the effect of future benefit payments and required contributions.
- Separate continuing real estate performance from prior-year discontinued fulfillment operations when comparing results.
- Monitor the deferred purchase price and rental cash flows associated with the former fulfillment services facilities.