AMREP Corporation 10-Q Summary
Business Context and Reporting Period
AMREP operates two primary segments: real estate, principally residential land sales in New Mexico, and fulfillment services through Palm Coast Data. The filing covers the three and nine months ended January 31, 2019, representing fiscal 2019 third quarter and first nine months. The filing is unaudited and identifies AMREP as a smaller reporting company.
Financial Performance and Position
| Metric | Three Months Ended January 31, 2019 | Three Months Ended January 31, 2018 | Nine Months Ended January 31, 2019 | Nine Months Ended January 31, 2018 |
|---|---|---|---|---|
| Revenue | $9.340 million | $10.379 million | $30.663 million | $30.880 million |
| Net income (loss) | $(32,000) | $(2.851) million | $84,000 | $(1.125) million |
| EPS, basic and diluted | $(0.00) | $(0.35) | $0.01 | $(0.14) |
| EBITDA | $59,000 | $622,000 | $661,000 | $3.865 million |
| Net cash from operating activities | Not separately reported | Not separately reported | $(524,000) | $1.535 million |
Third-quarter net margin was approximately negative 0.3%, compared with negative 27.5% in the prior-year quarter. Nine-month net margin was approximately 0.3%, compared with negative 3.6% in the prior-year period. The improvement in net income was driven substantially by the absence of the $3.057 million tax expense related to the 2017 Tax Cuts and Jobs Act recorded in the prior-year periods.
- Fulfillment services revenue declined 10.0% in the quarter to $6.916 million and 5.7% for the nine months to $21.302 million.
- Real estate revenue declined 5.3% in the quarter to $2.376 million but increased 35.1% for the nine months to $8.924 million.
- Other revenue was $48,000 in the quarter and $437,000 for the nine months, compared with $193,000 and $1.685 million, respectively, in the prior-year periods. The prior-year nine-month amount included a $1.318 million settlement gain.
- Real estate land-sale gross profit was approximately $414,000 in the quarter and $1.069 million for the nine months. Reported average gross profit percentages on New Mexico land sales were 17% and 12%, respectively.
- Cash and cash equivalents were $14.233 million at January 31, 2019, compared with $14.041 million at April 30, 2018.
- Total assets were $104.510 million and shareholders’ equity was $87.971 million at January 31, 2019.
- Real estate inventory was $58.749 million, representing approximately 56% of total assets.
- Accrued pension costs decreased to $6.929 million from $9.051 million after a $2.000 million pension contribution during the first nine months.
Debt and Liquidity
Notes payable, net increased to $2.554 million from $1.843 million at April 30, 2018, primarily to finance land development. The Lomas Encantadas loan had $1.340 million outstanding at January 31, 2019, against a $4.750 million commitment, and matures in December 2021. The Hawk Site loan had $1.286 million outstanding against a $1.800 million commitment and matures in July 2021. Both borrowers and AMREP Southwest were reported to be in compliance with applicable covenants at January 31, 2019.
Operating activities used $524,000 of cash, while financing activities provided $693,000, including $2.814 million of debt financing and $2.075 million of principal repayments. Investing activities provided $23,000, including $85,000 of life-insurance proceeds, partly offset by $62,000 of capital expenditures.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly stable for the nine months but declined in the third quarter, primarily because of lower fulfillment-services volume.
- Fulfillment-services profitability weakened materially: nine-month segment EBITDA fell to $1.913 million from $4.694 million, partly reflecting the prior-year $1.318 million settlement gain.
- Real estate nine-month revenue increased because of higher residential land sales, although segment EBITDA declined to $(167,000) from $389,000.
- The company moved from a prior-year nine-month net loss to modest net income, largely because the prior-year results included the one-time tax expense associated with tax-law changes.
- AMREP adopted ASC Topic 606 revenue recognition and reported no impact on results of operations.
- Prior-period financial statements were revised for certain deferred-tax, accounts-payable and retained-earnings balances; management stated the revisions were not material.
Outlook, Commentary, Risks, and Unusual Items
- Management did not provide quantitative earnings or revenue guidance.
- Fulfillment-services results remain exposed to reduced magazine circulation, competition from digital media, publisher cost pressures, customer insourcing, contract repricing, lost business, paper and printing costs, and postal rates.
- One customer representing approximately 6% of total company revenue for the first nine months of 2019 insourced a significant portion of its business in August 2018.
- Real estate revenue and margins may vary significantly based on the timing, location and mix of land transactions. The nine-month 2019 land-sale margin was affected by the mix of developed and undeveloped lots.
- The company made a $2.000 million pension contribution during the period. The PBGC agreements terminated in August 2018, with the PBGC deemed to have released the company and controlled-group members from claims under those agreements.
- The oil and gas lease covering approximately 55,000 surface acres was extended to September 2020 without an extension fee. No revenue was recorded for the extension, although future consideration or overriding royalty interests could become payable under specified conditions.
- Future liquidity depends on operating cash flow, existing cash, land-sale proceeds and availability of project-specific bank financing. Loan agreements contain customary covenants and events of default, including potential acceleration.
- Management stated that disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether fulfillment-services customer losses, pricing concessions and volume reductions continue into subsequent quarters.
- The timing, volume and profitability of New Mexico land sales and the remaining inventory supporting those sales.
- Operating cash flow and the company’s ability to fund pension obligations, development costs and working capital without additional borrowing.
- Outstanding balances, interest rates, collateral, covenant compliance and maturity requirements for the Lomas Encantadas and Hawk Site loans.
- The sustainability of reported earnings excluding the prior-year tax-law charge, settlement gain and other nonrecurring items.
- Potential changes to pension funding requirements and the remaining accumulated pension liability.