AMREP Corporation — Form 10-Q Summary
Business context and reporting period
AMREP Corporation operates primarily through land development and homebuilding subsidiaries in the United States. This unaudited Form 10-Q covers the quarter and six months ended October 31, 2022, within fiscal 2023, with comparisons to the corresponding 2021 periods.
Key financial metrics
| Metric | Three months ended Oct. 31, 2022 | Three months ended Oct. 31, 2021 | Six months ended Oct. 31, 2022 | Six months ended Oct. 31, 2021 |
|---|---|---|---|---|
| Revenue | $16.1 million | $16.1 million | $26.9 million | $26.1 million |
| Operating income | $4.5 million | $4.4 million | $7.0 million | $6.2 million |
| Net income | $3.6 million | $3.3 million | $5.5 million | $5.0 million |
| Diluted EPS | $0.68 | $0.45 | $1.04 | $0.67 |
| Net cash from operating activities | Not separately provided | Not separately provided | $(0.9) million | $2.9 million |
Second-quarter revenue was essentially flat year over year, while six-month revenue increased 3%. Approximate operating margins were 27.7% for the quarter and 26.2% year to date; approximate net margins were 22.4% and 20.6%, respectively.
- Quarterly land sale revenue increased 52% to $12.8 million; six-month land sale revenue increased 15% to $18.0 million, primarily because of developed residential lot availability and commercial lot sales.
- Quarterly home sale revenue increased to $2.9 million from $0.8 million; six-month home sale revenue increased to $8.3 million from $3.2 million. Homes sold increased to five from three for the quarter and to 16 from 11 year to date.
- Building sales and other revenue declined to $0.4 million for the quarter and $0.5 million year to date, versus $6.8 million and $7.2 million in the prior periods, because the prior year included the sale of a 143,000-square-foot warehouse and office facility.
- Land sale gross margin was 34% for the quarter and 35% year to date, versus 29% in both prior-year periods. Home sale gross margin was 29% and 32%, respectively, versus 23% and 21%.
- General and administrative expense decreased 8% for the quarter and 5% year to date, although homebuilding administrative costs increased because of additional employees.
Balance sheet, cash flow, debt, and liquidity
- Cash and cash equivalents were $12.9 million at October 31, 2022, down from $15.7 million at April 30, 2022 and $30.3 million at October 31, 2021.
- Real estate inventory increased 4% to $70.0 million from April 30, 2022. Homebuilding construction in process rose 69% to $5.6 million, reflecting longer construction cycles.
- Total liabilities declined to $7.2 million from $11.8 million, while shareholders’ equity increased to $89.0 million from $83.2 million.
- Notes payable declined to $0.3 million from $2.0 million, primarily due to $1.8 million of principal repayments. The Company was in compliance with its debt covenants at October 31, 2022.
- The revolving credit facility was amended in August 2022: maximum availability increased to $5.75 million, the rate became one-month SOFR plus 3.15%, and maturity was extended to August 2025. No revolving-line principal was outstanding at October 31, 2022.
- Available borrowing capacity was subject to a $1.323 million letter of credit and $0.250 million reserved for credit card usage. Additional La Mirada loan reserves of $2.364 million guaranteed municipal improvement obligations.
- Operating cash flow was negative year to date, principally because of investment in real estate inventory and other assets and payments of taxes and accrued liabilities. Investing cash flow was $(0.1) million, and financing cash flow was $(1.8) million.
Material changes versus the prior comparable period
- Profitability improved despite nearly flat quarterly revenue, supported by higher land and home sale margins, lower corporate expenses, and a substantially lower share count.
- Weighted-average diluted shares declined to 5.3 million from 7.4 million, contributing to the increase in diluted EPS.
- Homebuilding expanded materially, but construction-in-process inventory increased because of supply chain constraints, labor shortages, and approval and inspection delays.
- The prior-year sale of the Florida warehouse caused a significant reduction in building sales and other revenue and eliminated the related cost of revenue in the current period.
- The Company recorded no impairment charges on real estate inventory or investment assets in either comparable period.
Outlook, risks, contingencies, and unusual items
The filing does not provide quantitative revenue or earnings guidance. Management expects supply chain constraints, higher building material costs, skilled-labor shortages, and municipal approval and inspection delays to continue affecting land development and homebuilding at least through the remainder of 2022.
- Higher mortgage rates, inflation, rising home prices, and weaker affordability have tempered demand for new homes and finished residential lots.
- The Company increased sales incentives on certain homes and slowed housing starts and land development activity in response to affordability and demand pressures.
- As of October 31, 2022, 32 homes were in production, including 12 under contract representing approximately $6.3 million of expected closing revenue, subject to cancellations and change orders.
- Land sale revenue is concentrated: four customers exceeded 10% of quarterly revenue and three customers exceeded 10% of six-month revenue. All such revenue was in land development.
- The Company expects a tax loss related to worthless stock of Palm Coast Data Holdco, Inc., but the amount had not yet been determined.
- A 50,000-share CEO stock option with a $14.24 exercise price remained outstanding and out of the money at October 31, 2022.
- The Board amended the Company’s bylaws effective December 7, 2022, including provisions governing virtual shareholder meetings and advance-notice procedures for shareholder nominations and proposals.
- Management concluded that disclosure controls and procedures were effective as of October 31, 2022 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether negative operating cash flow persists as real estate inventory and homebuilding construction activity expand.
- The sustainability of reported land and home gross-margin improvements, which management states can vary significantly with transaction mix and timing.
- The effect of higher mortgage rates and affordability pressures on home orders, cancellations, incentives, lot demand, and future housing starts.
- Exposure to customer concentration in land sales and the timing of closings for the $6.3 million of homes under contract.
- Completion obligations supported by the $1.323 million letter of credit and $2.364 million of municipal loan reserves.
- The eventual amount and timing of the tax loss associated with Palm Coast Data Holdco, Inc.