AMREP Corporation Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended January 31, 2018, filed March 19, 2018. AMREP operates through real estate and fulfillment services segments. Amounts below are in thousands unless otherwise stated.
Business Context and Financial Position
- Real estate operations are conducted primarily through AMREP Southwest and include land development and sales in New Mexico and elsewhere.
- Fulfillment services are provided primarily by Palm Coast Data, serving publishers and other customers.
- Cash and cash equivalents were $13,854 at January 31, 2018, compared with $11,811 at April 30, 2017.
- Total assets were $105,838, including $58,271 of real estate inventory and $9,714 of investment assets.
- Total liabilities were $21,226 and shareholders’ equity was $84,612. Accrued pension costs were $9,707.
Key Financial Metrics
| Metric | Three Months Ended January 31, 2018 | Three Months Ended January 31, 2017 | Nine Months Ended January 31, 2018 | Nine Months Ended January 31, 2017 |
|---|---|---|---|---|
| Revenue | $10,379 | $9,777 | $30,880 | $33,450 |
| Income before taxes | $285 | $270 | $2,862 | $1,357 |
| Income tax provision | $3,136 | $96 | $3,987 | $441 |
| Net income (loss) | $(2,851) | $174 | $(1,125) | $916 |
| Basic and diluted EPS | $(0.35) | $0.02 | $(0.14) | $0.11 |
| EBITDA | $622 | $783 | $3,865 | $2,893 |
Revenue increased 6.2% in the quarter but declined 7.7% for the nine-month period. Reported net margins were approximately negative 27.5% for the quarter and negative 3.6% for the nine months, compared with positive margins of approximately 1.8% and 2.7%, respectively, in the prior-year periods. The income tax provision included a $3,057 provisional increase related to the Tax Cuts and Jobs Act.
Revenue and Segment Performance
- Fulfillment services: Revenue was $7,676 for the quarter and $22,592 for the nine months, compared with $8,222 and $23,908 in the prior-year periods. Lower volumes, price concessions and lost business reduced revenue. Segment EBITDA was $1,073 for the quarter and $4,694 for the nine months, including the $1,318 Florida settlement gain in the nine-month period.
- Real estate: Land-sale revenue was $2,510 for the quarter and $6,603 for the nine months, compared with $1,461 and $7,710. The nine-month 2018 results included $2,044 from the sale of an approximately five-acre undeveloped commercial property in Colorado, with a 65% gross profit percentage.
- New Mexico land-sale gross profit percentages were 16% for the quarter and 17% for the nine months, versus 42% and 17% in the comparable 2017 periods. Management cautioned that land-sale results vary significantly based on transaction timing and property mix.
- Other revenue included a $1,318 pre-tax gain from the Florida settlement in 2018. The comparable 2017 period included a $1,496 gain from the sale of a retail commercial building.
Cash Flow, Debt and Liquidity
- Net cash provided by operating activities was $1,535 for the first nine months of 2018, down from $7,607 in 2017. The decline primarily reflected changes in real estate inventory and investment assets and the absence of the prior-year working-capital benefit.
- Capital expenditures were $130, compared with $63 in the prior-year period.
- Financing activities provided $638, compared with $11,353 of financing cash used in 2017, when the Company made substantial debt repayments, including $10,798 to a related party.
- Notes payable were $638 at January 31, 2018, compared with none at April 30, 2017. The debt arose under a new real estate development line of credit with a maximum commitment of $4,750, secured by 343 planned residential lots and guaranteed by AMREP Southwest.
- The development loan bears interest at 30-day LIBOR plus 3.0%, matures December 18, 2021, and was in covenant compliance at January 31, 2018. AMREP Southwest must maintain tangible net worth of at least $35,000 under the loan documentation.
Material Changes, Outlook and Risks
- A fulfillment-services customer representing approximately 10.3% of total nine-month revenue notified Palm Coast that a significant portion of its business would transfer away at the end of 2018. The filing does not quantify the expected future revenue loss.
- Palm Coast settled obligations related to a 2009 Florida incentive award. It agreed to pay $1,763, including quarterly payments through July 2027, and recognized a $1,318 pre-tax gain. In February 2018, Palm Coast paid $956 under a release agreement that terminated the remaining payment obligations; management expected to recognize an additional gain of approximately $257 in the fourth quarter of fiscal 2018.
- The Tax Cuts and Jobs Act produced a provisional $3,259 reduction in net deferred tax assets and a $3,057 net increase in income tax expense. The accounting was incomplete as of January 31, 2018 and could change before the fiscal 2018 Form 10-K.
- Management identified continued pressure on magazine publishers from digital media, alternative distribution technologies, weak advertising, and higher paper, printing and postal costs. These conditions may reduce fulfillment volumes and pricing.
- Real estate results remain dependent on the timing, mix and profitability of land transactions, while development activity increases inventory and working-capital needs.
- The Company contributed $1,040 to its pension plan during the nine months. Certain real property secures $4,535 of pension-related obligations, and additional contributions could be required if collateral values fall below specified thresholds.
- The Company expects to adopt the new revenue recognition standard, Topic 606, using the modified retrospective method on May 1, 2018. As of January 31, 2018, it had not determined the standard’s impact on the financial statements.
Most Important Facts to Verify
- Magnitude and timing of the customer business transfer expected at the end of calendar 2018 and its effect on Palm Coast revenue and EBITDA.
- Final accounting for the Tax Cuts and Jobs Act, including any change to the $3,259 deferred-tax adjustment and reported tax expense.
- Actual utilization, covenants, collateral and repayment schedule of the $4,750 development credit facility.
- Whether the expected $257 gain from the Florida release agreement was recognized as projected.
- Operating cash flow conversion, real estate inventory growth and future land-sale margins.
- Implementation impact of Topic 606 beginning May 1, 2018.