AMREP Corporation — Form 10-Q Summary
Business context and reporting period
AMREP operates primarily through two segments: land development and homebuilding, with activities limited to the United States. This report covers the three months ended July 31, 2022, the first quarter of fiscal 2023, compared with the three months ended July 31, 2021. The financial statements are unaudited.
Financial performance and position
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Total revenue | $11.232 million | $10.507 million | 7% |
| Operating income | $2.566 million | $1.795 million | 43% |
| Net income | $1.912 million | $1.637 million | 17% |
| Diluted EPS | $0.36 | $0.22 | 64% |
| Operating margin | 22.8% | 17.1% | Improved |
| Net margin | 17.0% | 15.6% | Improved |
| Operating cash flow | $0.262 million | $(4.466) million | Improved by $4.728 million |
- Land sale revenue declined 28% to $5.172 million, primarily because of reduced availability of developed residential lots. Land gross margin increased to 26% from 22%.
- Home sale revenue increased 126% to $5.439 million. The company sold 11 homes versus 8, and average selling price increased to $494,000 from $301,000. Home gross margin improved to 33% from 21%.
- Other revenue declined 31% to $621,000. The prior-year period included $185,000 received in connection with a warranty-provider bankruptcy and $45,000 of debt forgiveness; no other income was recorded in the current period.
- General and administrative expense was substantially unchanged at $1.171 million versus $1.188 million.
- Cash and cash equivalents were $15.915 million at July 31, 2022, compared with $15.721 million at April 30, 2022. Total assets were $96.801 million and shareholders’ equity was $85.317 million.
- Real estate inventory increased 2% to $68.604 million, including $60.528 million of New Mexico land inventory and $4.641 million of homebuilding inventory.
- Notes payable were $2.080 million at July 31, 2022, compared with $2.030 million at April 30, 2022. The company was in compliance with its financial covenants. Interest rates disclosed were 5.36% on the revolving line and La Mirada loan and 2.35% on equipment financing.
Material changes versus the prior comparable period
- Revenue mix shifted materially from land sales toward homebuilding, with home sales more than doubling while land sales declined.
- Higher home volumes, selling prices and reported efficiencies increased homebuilding gross margin.
- Operating cash flow turned positive, primarily because of improved earnings and smaller investments in real estate inventory and investment assets compared with the prior-year quarter.
- Financing cash inflow fell to $50,000 from $2.940 million because the prior-year period included substantially higher debt proceeds. No principal debt payments were made in the current quarter.
- Weighted average diluted shares declined to 5.296 million from 7.373 million, contributing to the increase in diluted EPS.
- Homebuilding construction in process increased 10% to $3.636 million, while finished home inventory declined 11% to $1.005 million.
Guidance, outlook, risks and unusual items
- Management did not provide formal quantitative earnings or revenue guidance.
- Supply-chain constraints, higher building-material costs, skilled-labor shortages and delays in municipal approvals and inspections affected both segments, causing construction and revenue-recognition delays and higher costs.
- Higher mortgage rates, inflation and increased housing costs reduced affordability and tempered demand for new homes. The company increased sales incentives on certain finished and in-process homes and expects these conditions to continue through at least the remainder of 2022.
- As of July 31, 2022, 32 homes were in production, including 13 under contract representing $7.535 million of expected revenue at closing, subject to cancellations and change orders.
- The company identified potential exposure to future real estate inventory impairment charges because of market-condition and development-cost volatility; no impairment charges were recorded in either comparable quarter.
- At July 31, 2022, the company had a $1.323 million letter of credit and $2.364 million of loan reserves supporting municipal completion obligations. These amounts were not included in notes payable.
- In August 2022, the revolving credit facility’s maximum availability increased by $1.750 million to $5.750 million. The amended facility bears interest at one-month SOFR plus 3.15% and matures August 15, 2025.
- Two customers each accounted for more than 10% of quarterly revenue, contributing $2.360 million and $2.341 million, respectively, creating customer-concentration risk in land development.
- Disclosure controls and procedures were deemed effective as of July 31, 2022, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether higher mortgage rates and affordability pressure reduce home orders, closings, pricing or margins after the reporting date.
- The status, timing and profitability of the 13 homes under contract and the remaining homes in production.
- Availability and utilization of the expanded revolving credit facility, including its SOFR-based borrowing cost and covenant requirements.
- Potential obligations associated with the letter of credit, municipal loan reserves and subdivision completion commitments.
- Customer concentration and the timing of future land-sale transactions, given the quarter’s lower lot availability.
- Whether inventory growth, construction-cost inflation or weaker demand results in future impairment charges or increased sales incentives.