AMREP Corporation 2023 Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2023, compared with fiscal year ended April 30, 2022. The provided filing is not a 2022 fourth-quarter report; it is the annual report for fiscal 2023.
Business Context
AMREP operates primarily in two U.S. segments: land development and homebuilding. Its business is concentrated in Rio Rancho and surrounding Sandoval County, New Mexico. At April 30, 2023, the Company owned approximately 17,000 acres in Sandoval County and also held an approximately 160-acre property in Brighton, Colorado planned for 410 homes. The Company had 28 full-time employees.
Key Financial Metrics
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Total revenue | $48.676 million | $58.926 million | Down 17% |
| Land sale revenue | $30.659 million | $36.200 million | Down 15% |
| Home sale revenue | $16.691 million | $13.565 million | Up 23% |
| Building sales and other revenue | $1.326 million | $9.161 million | Down 86% |
| Operating income | $5.830 million | $21.303 million | Down 73% |
| Net income | $21.790 million | $15.862 million | Up 37% |
| Diluted EPS | $4.11 | $2.21 | Up 86% |
| Net cash from operating activities | $6.389 million | $15.476 million | Down 59% |
| Cash and cash equivalents | $19.993 million | $15.721 million | Up $4.272 million |
| Notes payable | $44 thousand | $2.030 million | Down 98% |
Reported total gross profit was approximately $18.899 million in 2023 versus $26.657 million in 2022, implying a consolidated gross margin of approximately 38.8% versus 45.2%. Land sale gross margin declined to 42% from 51%, while home sale gross margin improved to 28% from 25%. Operating margin declined to approximately 12.0% from 36.2%.
The unusually strong net income and EPS increase was primarily driven by a $14.149 million income tax benefit, including a $16.071 million non-cash tax benefit associated with a worthless-stock deduction. This benefit more than offset the effect of a $7.597 million non-cash pension settlement expense and substantially lower operating income.
Material Changes Versus the Prior Period
- Land sale revenue declined because of lower developed commercial and undeveloped land sales, partially offset by higher developed residential land revenue. The prior year included a significant 1,196-acre undeveloped land sale generating $7.107 million.
- Home sale revenue increased despite lower unit volume: homes sold declined to 32 from 41, while average selling price increased to approximately $525 thousand from $331 thousand.
- Building sales and other revenue fell sharply because fiscal 2022 included sales of a Palm Coast warehouse and office facility and a La Mirada retail building. No building sales were recorded in 2023.
- The Company reduced homes in production to 18 from 38, including 10 homes under contract at April 30, 2023 versus 17 in the prior year. Contracted homes represented approximately $5.640 million of expected revenue, subject to cancellations and changes.
- Operating results were pressured by supply-chain constraints, higher material costs, skilled-labor shortages, delayed municipal approvals and inspections, and higher mortgage rates.
- Real estate inventory declined modestly to $65.625 million from $67.249 million. Homebuilding construction in process declined 50% to $1.648 million.
- Investment assets increased to $13.747 million from $9.017 million, including $4.786 million of owned real estate leased or intended to be leased. Eight homes were leased to residential tenants and two buildings under construction had been leased to commercial tenants.
- Shareholders’ equity increased to $111.000 million from $83.162 million, helped by net income and $5.743 million of other comprehensive income primarily related to the pension settlement.
Cash Flow, Liquidity and Debt
- Operating cash flow was $6.389 million, down from $15.476 million, primarily reflecting lower cash generation, increased investment assets and other assets, and reductions in payables and tax liabilities.
- Investing cash use was $131 thousand, compared with $1.195 million in 2022.
- Financing cash use was $1.986 million, primarily due to debt repayments. The prior year included $21.904 million of share repurchases.
- Cash increased to $19.993 million at year-end. Management stated that available cash, bank financing and operating cash flows should be adequate for anticipated fiscal 2024 spending.
- Outstanding notes payable totaled $44 thousand. The Company also had a $4.177 million revolving credit facility with no outstanding principal reported at year-end and $4.177 million available for new borrowings, subject to borrowing conditions.
- Credit support obligations included a $1.323 million letter of credit and $2.364 million of loan reserves related to municipal improvement obligations; these amounts were not recorded as outstanding debt.
Outlook, Risks and Unusual Items
- Management expects affordability pressures, elevated mortgage rates, inflation, supply-chain disruption and labor shortages to continue affecting land development and homebuilding at least through the remainder of calendar 2023.
- The Company increased sales incentives, leased completed homes opportunistically, and slowed housing starts and land development activity in response to weaker affordability and demand.
- Construction and land costs remained elevated, although pricing increases offset much of the cost pressure in 2023 and 2022. Management cautioned that this pricing environment may not continue.
- The $16.071 million tax benefit arose from a $62.180 million tax loss generated by a worthless-stock deduction related to the former fulfillment-services business. The benefit depends on future taxable income and remains subject to possible IRS review or adjustment.
- The Company recorded no real estate or investment-asset impairment charges in 2023 or 2022, but future impairment charges could be material because valuations depend on projected sales prices, holding periods, development costs and completion estimates.
- Land sale cost allocations rely on estimates of common development costs and costs to complete; this was identified as the fiscal 2023 critical audit matter.
- Approximately 95% of 2023 developed residential land sale revenue was generated from four homebuilders, creating customer concentration risk. Three customers each contributed more than 10% of total revenue.
- The Company is geographically concentrated in New Mexico and faces risks from competition, regulation, environmental requirements, severe weather, natural disasters, public-health events and changing housing demand.
- Management reported that pending or threatened ordinary-course legal matters were not expected to have a material adverse effect. No off-balance-sheet arrangements were reported.
- The Company has paid no cash dividends since fiscal 2008 and provided no assurance that dividends will resume.
Important Facts for Investors to Verify
- Reconcile reported net income and EPS to normalized earnings excluding the non-cash tax benefit, pension settlement expense and other unusual items.
- Review the realizability of the $12.493 million net deferred tax asset and the potential IRS or state-tax challenge to the worthless-stock deduction.
- Assess demand, cancellations, incentives, backlog conversion and pricing for the 18 homes in production and the 10 homes under contract.
- Monitor land sale volumes and mix, particularly the absence of a prior-year-scale undeveloped land sale.
- Evaluate the concentration of land sale revenue among four homebuilder customers and the Company’s dependence on the Rio Rancho market.
- Review the terms, collateral, covenants, availability and future use of the revolving credit facility, including the letter of credit and municipal improvement reserves.
- Test assumptions supporting land inventory valuations, common-cost allocations and the absence of impairment charges.
- Confirm whether elevated material, labor, permitting and mortgage costs continue to pressure margins and housing demand.