AMREP Corporation — Fiscal 2017 Form 10-K Summary
Business Context and Reporting Period
AMREP Corporation reported on its fiscal year ended April 30, 2017, not a standalone fourth quarter. The company operates through two principal segments: real estate development and land sales in and around Rio Rancho, New Mexico, and fulfillment and contact-center services operated by Palm Coast Data LLC. The company had approximately 349 full-time and 55 part-time employees as of July 1, 2017.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $42.368 million | $41.664 million | Up $0.704 million |
| Net loss | $15 thousand | $10.224 million | Improved $10.209 million |
| Loss per share | $0.00 | $1.27 loss | Improved |
| Income before taxes | $982 thousand | $15.435 million loss | Improved |
| Operating cash flow | $10.437 million | $3.467 million | Up $6.970 million |
| Cash and equivalents | $11.811 million | $14.562 million | Down $2.751 million |
| Debt | None reported | $12.939 million | Reduced to zero |
| Total assets | $106.676 million | $120.628 million | Down $13.952 million |
| Shareholders’ equity | $84.833 million | $82.844 million | Up $1.989 million |
Fulfillment-services revenue declined 10.7% to $31.030 million, while real estate land-sale revenue increased 64.7% to $9.381 million. Other revenue was $1.957 million and included a $1.496 million pretax gain from selling a single-tenant retail building. Real estate gross profit before indirect costs was approximately 18% of land-sale revenue versus 14% in 2016.
Reported 2017 results included a $150 thousand pretax, non-cash real estate impairment charge. Excluding impairment charges, continuing-operations results improved to approximately $80 thousand of net income, or $0.01 per share, from a $3.668 million loss, or $0.46 per share, in 2016. The 2016 results included $10.406 million of impairment charges, including $7.900 million related to fulfillment-services assets and $2.506 million related primarily to real estate inventory.
Net cash provided by operating activities was $10.437 million. Capital expenditures were $249 thousand. Financing activities used $12.939 million, primarily reflecting repayment of the $12.384 million related-party loan and repayment of other debt. The company stated that cash and operating cash flows were expected to be adequate for anticipated fiscal 2018 capital expenditures and land-development spending.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue increased modestly, but the mix shifted materially toward real estate as fulfillment-services revenue declined.
- Real estate sales increased to 37 acres and $9.381 million from 61 acres and $5.697 million. The higher average price per acre primarily reflected one commercial tract sale; developed-land pricing declined to approximately $352 thousand per acre from $372 thousand.
- Fulfillment-services operating expenses declined to $26.628 million from $31.764 million, and related general and administrative expense declined to $1.362 million from $3.169 million, reflecting lower volumes and reduced amortization and facility-related costs.
- Interest expense fell 75.5% to $333 thousand after the company satisfied two notes payable. Notes payable decreased from $12.939 million to zero.
- Real estate inventory declined to $56.090 million from $61.663 million, while cash declined to $11.811 million after substantial debt repayment.
- The pension deficit improved to $10.967 million from $12.710 million, generating $1.861 million of after-tax other comprehensive income.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected approximately 9% of consolidated 2017 revenue to be affected by significant fulfillment-services customer changes in fiscal 2018 and an additional approximately 4% in fiscal 2019. Expected replacement revenue was materially lower than anticipated lost revenue.
- Fulfillment services face continued pressure from alternative media, declining magazine subscriptions, lower advertising revenue, paper and printing costs, postal rates, intense competition, and customer price sensitivity. The five largest fulfillment customers represented 42% of 2017 segment revenue.
- Real estate results depend on Rio Rancho market conditions, land-sale timing, development costs, customer demand, access to financing, governmental approvals, infrastructure, and available water service. Additional lot development requires significant financing that may not be available.
- Approximately 17,000 acres of other undeveloped New Mexico property remained, in addition to approximately 12,000 acres classified as long-term investment land. Development of undeveloped property is not assured.
- The company had a frozen defined-benefit pension plan with $23.277 million of assets and $34.244 million of liabilities at April 30, 2017. It planned fiscal 2018 minimum contributions of $795 thousand and expected benefit payments of approximately $2.469 million to $2.798 million annually during fiscal 2018–2022.
- Real property was pledged to the Pension Benefit Guaranty Corporation. The accelerated pension funding liability was $5.0195 million at April 30, 2017 and declined to $4.5345 million after a May 2017 property sale and $485 thousand pension contribution. Failure to comply with the PBGC settlement could permit foreclosure or other enforcement against mortgaged properties.
- Palm Coast settled a Florida incentive-program dispute in May 2017 for $1.763 million, payable as $163 thousand initially and 40 quarterly payments of $40 thousand through July 2027. AMREP guaranteed the obligations. Palm Coast expected a fiscal 2018 pretax gain of approximately $1.318 million and deferred revenue of approximately $302 thousand.
- Real estate impairments may recur because valuations depend on estimated selling prices, holding periods, development costs, and future cash flows. The company also identified significant judgment in pension, tax, doubtful-account, and deferred-tax-asset estimates.
- The company had a $9.519 million net deferred tax asset and approximately $28 million of taxable income would be required to utilize its federal net operating loss carryforward before expiration. The filing does not provide a clear consolidated EBITDA margin; reported consolidated EBITDA was $2.860 million, or approximately 6.8% of revenue.
- The company did not pay cash dividends during fiscal 2017 and has not paid cash dividends since fiscal 2008. Revenue recognition standard Topic 606 was not expected to be adopted early; the quantitative impact had not yet been determined.
Most Important Facts for Investors to Verify
- Whether expected fulfillment-services customer losses in fiscal 2018 and 2019 occur and whether replacement contracts offset the revenue decline.
- The sustainability and composition of real estate sales, particularly the effect of one-time commercial-property transactions on revenue, margins, and cash flow.
- Available cash after debt repayment and the funding required for future land development, pension contributions, and Florida settlement payments.
- Compliance with PBGC settlement covenants, required property appraisals, minimum pension contributions, and potential accelerated funding obligations.
- Future impairment exposure for Rio Rancho real estate and fulfillment-services assets.
- Realization of the $9.519 million deferred tax asset and the company’s ability to generate sufficient taxable income.
- The filing’s audited financial statements and disclosures regarding related-party financing, customer concentration, guarantees, legal contingencies, and subsequent events.