AMREP Corporation: FY2019 Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2019. The filing is an annual Form 10-K, not a quarterly report; the supplied metadata reference to “2018 Q4” does not match the filing period.
Business Context
AMREP operates primarily as a real estate company, focused on residential, commercial and industrial land in and around Rio Rancho, New Mexico. It owned approximately 18,000 acres in Rio Rancho as of July 1, 2019. The company also owns investment properties in Palm Coast, Florida, land and mineral interests in New Mexico and Colorado, and other real estate assets.
On April 26, 2019, AMREP sold its fulfillment services business. That business is presented as discontinued operations, leaving real estate as the company’s continuing operating segment. AMREP had 9 full-time and 2 part-time employees as of July 1, 2019.
Financial Highlights
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Continuing-operations revenue | $12.831 million | $8.927 million | 44% increase |
| Land-sale revenue | $12.313 million | $8.439 million | 46% increase |
| Loss from continuing operations | $2.465 million | $2.564 million | Loss narrowed |
| Continuing-operations loss per share | $0.30 | $0.32 | Improved |
| Income from discontinued operations | $3.992 million | $2.802 million | 42% increase |
| Net income | $1.527 million | $238,000 | Substantial increase |
| Basic earnings per share | $0.19 | $0.03 | Improved |
| Cash flow from operating activities | $592,000 | $531,000 | Increase |
| Cash flow from continuing operations | $(2.036) million | $(2.210) million | Lower cash use |
Land sales totaled 65 residential acres in FY2019 at an average of approximately $190,000 per acre, compared with 27 acres at approximately $237,000 per acre in FY2018. The average gross profit percentage on New Mexico land sales before indirect costs declined to 12% from 16%.
Real estate operating expenses declined to $990,000 from $1.652 million. Real estate general and administrative expenses increased to $625,000 from $578,000, while corporate general and administrative expenses increased to $3.589 million from $3.474 million. Interest expense was $25,000, compared with $5,000.
Liquidity, Assets and Debt
- Cash and cash equivalents were $13.267 million at April 30, 2019, plus $969,000 of restricted cash, versus $10.851 million of cash at April 30, 2018.
- Real estate inventory declined to $57.773 million from $58.874 million. Investment assets declined to $17.227 million from $17.725 million.
- Notes payable, net declined to $1.319 million from $1.843 million. Debt consisted primarily of real estate development borrowings.
- Total shareholders’ equity increased to $89.846 million from $87.130 million; total liabilities declined to $10.684 million from $19.095 million.
- Capital expenditures were approximately $8,000, compared with $52,000 in FY2018. Management stated that cash, bank financing and operating cash flows were adequate for anticipated FY2020 capital expenditures and land development spending.
- At April 30, 2019, the Lomas Encantadas loan had $181,000 outstanding and the Hawk Site loan had $1.203 million outstanding. The Lomas Encantadas loan was fully repaid in June 2019, and a replacement facility with a maximum commitment of $2.475 million was entered into.
Discontinued Operations and Unusual Items
The fulfillment services business was sold for $1.0 million in cash. The transaction also generated $3.1 million of cash distributions to AMREP and a deferred purchase-price asset of $5.636 million related to above-market lease payments on two Palm Coast facilities. The pretax gain on sale was $2.506 million.
AMREP retained ownership of the leased Palm Coast facilities and entered into 10-year triple-net leases with aggregate annual rent beginning at $1.9 million and increasing to $2.515 million in year ten, subject to the stated lease terms and acceleration provisions.
The sale triggered approximately $5.194 million of accelerated pension-funding obligations. AMREP elected to satisfy this obligation over seven years beginning in fiscal 2021.
Pension, Taxes and Other Matters
- The defined-benefit pension plan was underfunded by $6.401 million at April 30, 2019, an improvement from $9.051 million in FY2018. The company contributed $2.0 million to the plan in FY2019; no required minimum contribution was expected for FY2020.
- The company recorded a $708,000 income-tax benefit from continuing operations, compared with a $279,000 benefit in FY2018. Net deferred tax assets increased to $4.536 million, including a $2.079 million federal net operating loss carryforward asset.
- Federal net operating loss carryforwards were approximately $9.9 million; state net operating loss carryforwards were approximately $115.4 million, with some beginning to expire in fiscal 2020.
- No non-cash impairment charges were recorded on real estate inventory or investment assets in FY2019 or FY2018, although management noted that future impairment charges remain possible.
- Management stated that pending or threatened ordinary-course legal matters were not expected to have a material adverse effect on financial position, liquidity or results of operations.
Outlook, Risks and Management Commentary
- Results are highly dependent on the timing, pricing and mix of land sales. Management cautioned that prior-period results may not indicate future performance.
- Approximately 92% of FY2019 land sales were made to four homebuilders, creating customer concentration risk.
- The business is geographically concentrated in Rio Rancho and is exposed to local housing demand, homebuilder activity, interest rates, development costs, labor and material shortages, tariffs and inflation.
- Further development of under-development and undeveloped acreage requires substantial financing that may not be available on acceptable terms.
- Real estate inventory valuations depend on estimated sales prices, holding periods, development costs and future cash flows. Changes in those assumptions could result in material impairment charges.
- Public improvement districts and private infrastructure reimbursement covenants are expected to reimburse certain development costs over periods of at least 30 years beginning in fiscal 2020 or 2021, but the timing and effectiveness of reimbursements are uncertain.
- AMREP is a holding company and depends on cash generated by subsidiaries and distributions from subsidiaries to fund corporate expenses and operations.
- The company paid no cash dividends on common stock since fiscal 2008 and provided no specific dividend guidance.
Most Important Facts to Verify
- Confirm that the relevant reporting period is the fiscal year ended April 30, 2019 rather than “2018 Q4.”
- Assess the sustainability of land-sale volume and margins after the FY2019 increase in revenue and decline in gross profit percentage.
- Review the fulfillment-business sale, including the $5.636 million deferred purchase-price asset and the continuing Palm Coast lease obligations.
- Evaluate future pension funding requirements, including the approximately $5.194 million accelerated obligation beginning in fiscal 2021.
- Verify available borrowing capacity, covenant compliance and repayment schedules for the Lomas Encantadas and Hawk Site development loans.
- Assess the recoverability of real estate inventory and deferred tax assets, particularly given geographic and customer concentration.
- Review the company’s cash generation excluding discontinued operations, since continuing operations used $2.036 million of cash in FY2019.
- Note that the financial statements received an unqualified audit opinion and management concluded that internal control over financial reporting was effective.