AMREP Corporation Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2020. The request metadata identifies “2019 Q4,” but the supplied filing is the fiscal 2020 annual report, filed July 24, 2020.
Business Context
AMREP is primarily a real estate company operating through subsidiaries, with substantial activity in Rio Rancho and surrounding areas of New Mexico. It develops and sells residential, commercial and industrial land, owns investment properties and mineral rights, and commenced internal homebuilding operations in 2020. The homebuilding operation generated no revenue during the year. The former fulfillment services business was sold on April 26, 2019 and is reported as discontinued operations.
As of July 1, 2020, the Company owned approximately 18,000 acres in Rio Rancho and had 15 full-time and one part-time employee. Approximately 97% of 2020 land sales were made to four homebuilders, creating customer and geographic concentration.
Financial Performance and Position
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $18.783 million | $12.754 million |
| Land-sale revenue | $16.641 million | $12.313 million |
| Rental income | $0.796 million | None comparable |
| Other revenue | $1.346 million | $0.441 million |
| Operating loss from continuing operations | $7.959 million | $3.225 million |
| Loss from continuing operations | $5.903 million | $2.465 million |
| Discontinued-operations income | None | $3.992 million |
| Net income/(loss) | $(5.903) million | $1.527 million |
| Basic and diluted EPS | $(0.73) | $0.19 |
| Operating cash flow | $0.765 million | $0.592 million |
| Cash and cash equivalents | $17.502 million | $13.267 million |
| Real estate inventory | $53.449 million | $57.773 million |
| Investment assets | $18.644 million | $17.227 million |
| Notes payable, net | $3.890 million | $1.319 million |
| Shareholders’ equity | $84.637 million | $89.846 million |
Developed residential land sales increased to 36.8 acres at an average of $430,000 per acre, compared with 32.9 acres at $369,000 per acre in 2019. Undeveloped residential land sales increased to 52.5 acres from 32.1 acres, but average revenue per acre declined to approximately $3,000 from $6,000. The reported gross profit percentage on New Mexico land sales before indirect costs improved to 16.7% from 12.5%.
Net loss included approximately $8.6 million of non-cash charges: a $2.929 million pension settlement charge and approximately $5.046 million of impairment/write-off related to deferred purchase price associated with leases to the sold fulfillment business. The Company recorded a $1.722 million income-tax benefit.
Cash increased by $3.266 million during the year, primarily from $0.765 million of operating cash flow and $2.510 million of net financing cash flow. Capital expenditures were $9,000.
Material Changes Versus 2019
- Revenue increased approximately 47%, driven by higher developed-land sales, $665,000 of corporate land sales, $796,000 of rental income and higher other revenue.
- The Company shifted fully toward real estate after the April 2019 sale of the fulfillment services business. The 2019 comparison includes $3.992 million of discontinued-operations income, including a $2.506 million pretax gain on sale.
- Operating results deteriorated despite higher revenue because of the $5.046 million deferred-purchase-price write-off, the $2.929 million pension settlement charge and higher real estate operating expenses.
- Real estate operating expenses increased to $1.979 million from $0.990 million, while corporate general and administrative expense declined to $2.537 million from $3.589 million.
- Notes payable increased by approximately $2.571 million to fund land development and construction. New or expanded facilities included financing for Lomas Encantadas, Hawk Site and a retail building at Las Fuentes.
- The pension deficit improved to $5.014 million from $6.401 million after $3.600 million of Company contributions and plan investment results. The Company also paid $7.280 million in lump-sum benefits to 309 former employees.
Liquidity, Debt and Outlook
Management stated that available cash, bank financing and operating cash flows were expected to fund anticipated fiscal 2021 capital expenditures and land-development spending. However, real estate assets are illiquid, and further development, homebuilding and commercial projects require financing that may not be available on acceptable terms.
At April 30, 2020, debt facilities included approximately $1.576 million outstanding under the Lomas Encantadas facility, $41,000 under the Hawk Site facility and $1.979 million under the Las Fuentes construction facility. The Company also received a $298,000 unsecured Paycheck Protection Program loan at 1% interest. Scheduled debt principal payments after April 30, 2020 totaled $3.894 million, including $3.036 million due in fiscal 2021.
In June 2020, the Company acquired approximately 28 acres in Bernalillo County, New Mexico, planned for 82 residential lots. The acquisition included $1.838 million of deferred purchase price, and a development facility of up to $3.750 million was arranged.
Risks, Contingencies and Unusual Items
- COVID-19: Pandemic restrictions reduced sales pace, delayed projects and deliveries, limited municipal and private services, and led some homebuilders to request restructured closing schedules. A prolonged downturn could reduce demand, increase defaults, impair inventory and restrict access to financing.
- Concentration: Operations are heavily concentrated in Rio Rancho, New Mexico, and approximately 97% of 2020 land sales were made to four homebuilders.
- Lease and litigation matters: The former fulfillment business did not pay rent from December 2019 through May 2020. The parties settled related litigation in May 2020; the leases were shortened to expire August 15, 2020, and the Company received $650,000 under the settlement, following a prior $625,000 payment.
- Pension: The frozen defined benefit plan remained underfunded by $5.014 million at year-end. No minimum contribution was expected for fiscal 2021, but future benefit payments and market performance remain relevant.
- Real estate valuation: Cost-to-complete estimates, sales prices, holding periods and impairment assumptions may materially affect reported margins and asset values. Management recorded no impairment of real estate inventory or investment assets in 2020 or 2019, but stated that future charges are possible.
- Taxes: Net deferred tax assets were $6.080 million, including federal and state loss carryforwards, with a $4.270 million valuation allowance. State net operating loss carryforwards of approximately $118.209 million begin expiring in fiscal 2021.
- Other commitment: The Company could be required to pay up to $250,000 to the Smithsonian Institution through May 2023 if the former fulfillment business fails to provide certain services.
Investor Verification Points
- Verify the impact of COVID-19 on fiscal 2021 land closings, homebuilder counterparties, construction schedules and liquidity.
- Review debt maturities, covenant compliance, guaranties and the ability to fund the $3.036 million of scheduled fiscal 2021 principal payments.
- Assess the recoverability of the $53.449 million real estate inventory and $18.644 million of investment assets under changing market conditions.
- Evaluate customer concentration and the financial condition of the four homebuilders responsible for approximately 97% of 2020 land sales.
- Track the fiscal 2021 performance of the new internal homebuilder and the Las Fuentes retail project, neither of which had established comparable operating results in the filing period.
- Confirm the final status of the former fulfillment-business leases, settlement proceeds and any remaining indemnification or litigation exposure.
- Review the pension plan’s $5.014 million funded deficit, assumptions and required future benefit payments.