A la the Prequel Trilogy, sometimes the sequel is the proper culmination of the story. And so here will be our deeper dive into AMREP Corporation and its merits after the gloom and doom of Part I. If you recall, the business had been through the ringer, with fraud, extreme exposure to the 2005-07 real estate bubble, and limited paths to improve the stock’s demand due to the company’s small size, location, and closely held ownership.
The Good News
Management
Due to some recent changes, Inverness thinks this locked-up value can be found. First, the Board of Directors has seen a steady growth in their share ownership, from 16% in 2015 to 24% in 2020, driving an increasing influence on day-to-day operations. Chris Vitale became CEO in 2017 after starting with the company in 2013. He hired on Adrienne Uleau as controller in 2018, and the company has made good incremental moves under their leadership to focus on the real estate business, not least of which is growing headcount to 15 people in 2020.
Under the new team’s efforts, AXR sold off the media services business in April 2019 (Palm Coast Data LLC) to focus on the New Mexico market. The sale afforded AXR $1mm in cash and two 10-year leases on 204k square feet of office space for two buildings in Florida. Pre-coronavirus, lease payments began at $1.9mm, growing to $2.5mm over ten years. Inverness suspects this lease has since been restructured, with a current estimated run rate payment of $1.4mm[1]. For AMREP’s present size of $18.8mm in revenue, even this $1.4mm is a nice stable base of cash flow for the next few years.
Assets and Operations
AMREP owns nearly 258 developed residential lots and 18,000 acres in Rio Rancho. 434 of those acres are under residential development and 140 are commercial, and over 1,700 lots are in various stages of residential development. The company has another 160-acre property in Brighton, CO, in the northern Denver suburbs, with plans to develop 410 more homes. These projects will all provide stable long-term cash flows for the Company. The company also owns mineral and oil rights on 55,000 acres in Sandoval County and 147 acres in Brighton. These rights accounted for roughly $600k of royalties from Brighton in 2020 (none from Sandoval), when the lessee on the property began drilling, adding another nice future cash flow stream for our interested buyers.
Operationally, AMREP manages the zoning, administrative, and construction processes to prepare its land for sale and development. This model, coupled with its longstanding relationship with the city of Rio Rancho and significant land ownership, affords the company the long-term opportunity to pick and choose its development projects strategically as the town grows. This has led to strong corporations moving operations to the area, with Intel, Safelite, HP, and Alliance Data employing over 3,000 people alone.
AMREP’s revenue growth has been ~45% each of the last two years to approximately $18.8mm in 2020, thanks to focus on the land sales business following the Palm Coast Data sale, and most recently an increase in revenue per acre sold of 17% from 2019 to 2020. In addition to the concierge land sales business, in 2020 AMREP began homebuilding operations (currently pre-revenue) in Rio Rancho, indicating management’s intent to expand into an active developer in the local geography.
Inverness views AMREP EBITDA as breakeven for 2020, as the company settled outstanding pension liabilities (non-cash expense of $2.9mm) and wrote off deferred purchase prices for development projects with its subsidiaries. This cleaned up some off-balance sheet liabilities, and the total cash to liability ratio is a realistic and comfortable 1.45x (more on that later). The Company’s deferred income tax assets now sit at $6mm as well, with the first expiry of NOL carryforwards not until 2038. These assets are not accounted for in net liquidation value.
Geography
Rio Rancho, population 98k, sits on the north side of the Albuquerque metropolitan statistical area (“MSA”), with its total population of 915,000 people. Rio Rancho itself is one of the fastest growing cities in the state – from 2010 to 2019, the town grew 13.5% compared to Albuquerque’s 2.6% and New Mexico’s overall 1.8%. The city operates a balanced budget, and the citizenry is quality:
- Owner-occupied housing accounts for 77% of residential real estate, compared to broader Albuquerque’s 60%
- Per capita income of $28k is above Sandoval County and New Mexico averages
- Rio Rancho’s poverty rate is 11%, compared to Albuquerque’s 17.6%
- Rio Rancho’s 92.8%-high-school graduate rate is 300bps higher than Albuquerque’s average, indicating a higher floor of real estate value and showing Inverness that it is a bit of a blue collar town on the rise.
Albuquerque is the anchor city of New Mexico, and sits roughly a 7-hour drive south of Denver, 7 hours east of Phoenix, AZ, and four hours north of El Paso, TX, and 8 hours west of Oklahoma City. US Air Force Base Kirtland sits in the southeast of the MSA, providing both an anchor for the city’s property values, yes, but also a catalyst: New Mexico’s state and municipal governments are working to attract growth by improving the aerospace footprint, pitching Kirtland’s research capabilities and the newly built Spaceport America flagship launch site just north of El Paso.
Inverness is bullish on the aerospace industry overall, and if New Mexico’s pitch takes off – thanks to the efforts of private aerospace companies like Virgin Galactic (SPCE) and Lockheed Martin (LMT), New Mexico’s tax friendly environment, and the new US Space Force – AMREP’s property values could benefit as more companies set up shop across the state.
Valuation
By our calculations, AMREP has grown its net liquidation value by 448%, from $6.6mm in 2016 to $36.2mm in 2020. The growth slowed down in 2019 and 2020 as AXR focused more on operations and growing the business, but the balance sheet is still healthy, with an 8:1 asset-to-liability ratio and $17mm of cash (cash to total liabilities was 1.45x, a healthy measure by any company’s standards). See below for a heartening liquidation value calculation:
Note these advance rates are very conservative by design. In order to accurately and conservatively price debt, major banking institutions utilize advance rates to calculate the value of assets in a bankruptcy scenario, discounting assets typically to the 75%-85% threshold for accounts receivable, 50% for inventory, and 40-50% for Net Property, Plant, and Equipment.
Inverness believes AMREP trades at or around its liquidation value due to the small shareholder base and the tiny nature of the company after the media segment selloff. But with all that negativity, Peter Cundill’s Radar is pinging at the nice balance sheet (a staple of the company since before the Recession), the new management team and its big plans for the future, and the aerospace industry as a nice macro-level cherry-on-top catalyst for the state of New Mexico. Demographically, Inverness expects Rio Rancho to continue to outpace the broader Albuquerque market in the short term, thanks in part to AMREP’s development efforts. Hopefully, a weakening influence of the legacy ownership base and the company’s own growth will alert Mr Market to some growing demand for the stock again – a good organic growth story in the desert.
Sources: company 10-k and proxy statements, US Census Bureau, newspacenm.org, and the City of Rio Rancho Finance Department
Disclaimer: Inverness is long SPCE.
[1] based on a $350k payment for the May-August period of 2020