AMREP Corporation: Fiscal 2022 Third-Quarter 10-Q Summary
Business context and reporting period
AMREP Corporation operates primarily through two segments: land development and homebuilding, with activities concentrated in the United States. This Form 10-Q covers the three and nine months ended January 31, 2022, the third quarter of fiscal 2022. The financial statements are unaudited.
Key financial metrics
| Metric | Three months ended Jan. 31, 2022 | Three months ended Jan. 31, 2021 | Nine months ended Jan. 31, 2022 | Nine months ended Jan. 31, 2021 |
|---|---|---|---|---|
| Total revenues | $9.816 million | $7.864 million | $36.559 million | $21.326 million |
| Operating income | $1.158 million | $2.524 million | $7.313 million | $3.736 million |
| Net income | $0.910 million | $2.093 million | $5.873 million | $3.484 million |
| Diluted EPS | $0.12 | $0.28 | $0.80 | $0.44 |
| Net cash provided by operating activities | Not separately presented | Not separately presented | $1.413 million | $1.426 million |
Land sale revenues were $5.879 million in the quarter and $21.535 million year to date. Home sale revenues were $3.376 million and $6.606 million, respectively. Building sales and other revenues were $0.561 million in the quarter and $8.418 million year to date, including a $6.750 million warehouse and office facility sale in October 2021.
Land sale gross margin was 24% in the quarter and 25% year to date, compared with 51% and 33% in the prior-year periods. Home sale gross margin was 22% in both current periods, compared with 14% in both prior-year periods. Consolidated net margin was approximately 9.3% for the quarter and 16.1% year to date.
At January 31, 2022, cash and cash equivalents were $27.300 million, compared with $24.801 million at April 30, 2021. Real estate inventory increased to $64.786 million from $55.589 million, while investment assets declined to $9.775 million from $13.582 million following the sale of the Palm Coast facility. Total assets were $105.140 million and shareholders’ equity was $95.218 million.
Notes payable, net increased to $5.726 million from $3.448 million at April 30, 2021. The notes bore a stated interest rate of 3.75% as of January 31, 2022. Scheduled principal repayments after January 31, 2022 totaled $5.739 million, consisting of $0.241 million in fiscal 2023 and $5.498 million in fiscal 2024. The Company was in compliance with its financial covenants.
Material changes versus the prior comparable period
- Quarterly revenue increased 25%, while nine-month revenue increased 71%, primarily from expanded homebuilding activity, higher land sales year to date, and the warehouse sale.
- Quarterly net income declined 57% and diluted EPS declined to $0.12 from $0.28. The decline reflected materially lower land sale margins and the absence of $0.300 million of prior-year Paycheck Protection Program debt forgiveness recognized in other income.
- Nine-month net income increased 69% and diluted EPS increased to $0.80 from $0.44. The increase included the warehouse sale, expanded homebuilding activity, a $0.650 million prior-year settlement that did not recur, and $0.300 million of prior-year PPP forgiveness.
- Homebuilding expanded to 22 homes sold year to date versus 7 in the prior-year period. As of January 31, 2022, 40 homes were in production, including 28 under contract representing $11.236 million of expected sales revenue at closing, subject to cancellations and change orders.
- Real estate inventory increased 17%, primarily from increased New Mexico land development activity, land acquisition, completed model homes and homes under construction.
- The Company acquired a 7,000-square-foot office building in Rio Rancho, New Mexico, and granted the CEO a 50,000-share stock option with a $14.24 exercise price and a November 2026 vesting date, subject to applicable employment conditions.
Cash flow, liquidity, outlook and risks
Year-to-date operating cash flow was $1.413 million. Investing activities used $1.167 million, primarily for $1.259 million of capital expenditures. Financing activities provided $2.253 million, including $6.857 million of debt financing and $4.554 million of principal repayments. Cash increased $2.499 million during the nine months.
Management identifies cash from operations, project-specific bank financing, a revolving line of credit and existing cash as principal funding sources. The Company is dependent on property sales and financing availability because land and homebuilding properties generally cannot be sold quickly. Management provides no quantitative revenue or earnings guidance in the filing.
- Supply-chain constraints, higher building-material prices, skilled-labor shortages, and delays in municipal approvals and inspections caused construction and revenue-recognition delays and increased costs.
- Land sale revenue, selling prices and gross margins can vary significantly based on the timing, location, size and mix of transactions.
- Future development and homebuilding require financing that may not be available on acceptable terms or at all.
- Revenue concentration is material: two customers exceeded 10% of quarterly revenue and three customers exceeded 10% of nine-month revenue; all were in land development.
- A $1.323 million letter of credit and $2.364 million of loan reserves guaranteed subdivision improvement obligations and were not included in reported notes payable.
- The frozen defined benefit pension plan remained a risk, although the pension liability declined primarily due to favorable investment results. No pension contributions were made during the current-year periods.
- Other income included nonrecurring items, including $0.185 million related to a warranty-provider bankruptcy, $0.045 million of debt forgiveness and $0.030 million from a life insurance policy.
Most important facts for investors to verify
- Whether the 28 homes under contract close on schedule and at the disclosed expected revenue value.
- Whether land sale margins recover from the current 24% quarterly and 25% year-to-date levels.
- The timing and funding of the $5.739 million of scheduled debt repayments and continued covenant compliance.
- The availability and utilization terms of the revolving credit facility and the effect of subdivision guarantees and reserves on liquidity.
- Whether supply-chain, labor, material-cost and municipal-approval pressures persist or affect homebuilding profitability.
- The sustainability of earnings excluding the warehouse sale and other nonrecurring income items.
- The effect of customer concentration and the timing of large land-development transactions on future results.
- Management’s disclosure that quarterly and interim results are not necessarily indicative of future performance.