AMREP: Over 90% Upside With $24 Million In Hidden Assets Held For Sale And New Homebuilding Unit

Dec. 02, 2020 12:31 PM ETAMREP Corporation (AXR)60 Comments7 Likes
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Nicholas Bodnar
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Summary

  • AMREP is a major land owner in the city of Rio Rancho, New Mexico, owning over 18,000 acres of land with a book value of $60 million.
  • AMREP recently launched a homebuilding subsidiary which will help unlock the massive land bank the Company owns and provide incremental cash flows for years to come.
  • In addition to the land, AMREP owns over $24 million of hidden assets currently listed for sale representing over two-thirds of the enterprise value.
  • The Company has recently repurchased over 10% of the shares outstanding. As additional hidden assets are sold, I expect further shareholder-friendly events.
  • My price target is $11.16 per share representing a 90% upside from the current price with a large margin of safety given the clean balance sheet and real asset ownership.

Background and Update:

I published my original write-up on AMREP ("(NYSE:AXR)" or the "Company") in June 2016, over 4 years ago. Readers can reference my previous write-up for a general background on AMREP. Although AMREP's share price has increased over 40% since my initial write-up, AMREP remains significantly undervalued and largely misunderstood by the market. Since my original publication, AMREP has increased its cash balance, repaid its outstanding debt, benefitted from a strengthening land market, started a successful homebuilding subsidiary, exited its subscription fulfillment business, and implemented a large repurchase program. Despite these positive changes, AMREP's market capitalization is $43 million and the enterprise value is just $36 million, which is actually lower than the Company's enterprise value when I wrote up AMREP in 2016. The Company has very little coverage on investor websites and no sell-side coverage. I hope this update provides readers with some helpful information that would otherwise be very challenging and time-consuming to track down.

Thesis:

  • AMREP owns 18,000 acres of land in Rio Rancho, New Mexico that has a book value of almost $60 million with most of the land on the books at historical cost from the 1960s and 1970s.
  • Homebuilder demand for AMREP's finished lots in Rio Rancho has steadily increased in recent years and has jumped dramatically thus far in 2020, leading to a higher volume of lot sales at higher prices.
  • AMREP recently launched a homebuilding subsidiary called Amreston that is off to a strong start, and the Company's massive land holdings should provide Amreston with a long-term cost advantage versus other homebuilders.
  • AMREP completed construction projects for Starbucks (SBUX) and Natural Grocers (NGVC) on Company land, highlighting the opportunity to create value from the existing land base and potentially create a recurring stream of rental income.
  • AMREP has over $24 million of hidden assets that are currently listed for sale including the recently constructed Natural Grocers building which is listed for $5.7 million and is currently under contract.
  • AMREP shed its media assets and is now a pure-play real estate company that can be more easily valued by investors.
  • Corporate governance has improved, with the Company hiring a full-time CEO and small-cap value investor Bob Robotti being added to the board.
  • AMREP has repurchased over 10% of outstanding shares in the last month as the Company's approach to capital allocation has been changed to benefit shareholders. The Company's share price has declined after the repurchases, suggesting potential investors might be unaware of this recent development.

Brief Overview of AMREP and Rio Rancho, New Mexico:

AMREP entered the New Mexico real estate market in the 1960s and early 1970s when it purchased 90,000 acres of land north of Albuquerque and marketed the area as Rio Rancho. AMREP subdivided the land into thousands of lots and began selling them via mass marketing and mail order methods. These marketing techniques were halted in the late 1970s and AMREP changed its focus to attracting economic activity to the area. Rio Rancho became the home of a large Intel plant in the early 1980s and has expanded ever since. Today, Rio Rancho is the fastest-growing city in New Mexico and has a population of almost 100,000 residents (the third largest city in the state). Rio Rancho is home to two medical facilities, two colleges, and several major employers including Intel (INTC), the U.S. Air Force, Sandia National Laboratories, Hewlett Packard (HPE), Bank of America (BAC), and T-Mobile (TMUS). Rio Rancho has been named one of the best places to live by publications including money.com, the Wall Street Journal, and Family Circle magazine. New Mexico has also experienced significant growth in recent years, attracting major employers including Google (GOOG) (GOOGL), Facebook (FB), Netflix (NFLX), Apple (AAPL), and Spaceport.

Rio Rancho, New Mexico

Overhead View of Rio Rancho

Source: krqe.com

Rio Rancho is the fastest-growing city in New Mexico and is expected to overtake Las Cruces as the second-largest city in New Mexico within the next few years. Rio Rancho has traditionally been viewed as a friendly place to conduct business. From 1980-2000, Rio Rancho averaged 750 housing starts annually. The pace of expansion nearly doubled to 1,500 housing starts annually from 2001-2008 as the city's population grew sharply and activity benefitted from the nationwide housing boom. Housing starts fell considerably from 2009-2019, averaging under 500 starts/year as the residential housing market slowly recovered and excess supply from the bubble was mopped up. The housing market has showed dramatic improvement thus far in 2020, with 753 housing starts through October (+74% ytd). Homebuilding was considered essential in Rio Rancho and demand for new homes in the area has benefitted from a migration of people from urban areas, low interest rates, and the general affordability of homes in the area. The recent pace for housing starts is only now approaching the long-term average, and Rio Rancho and New Mexico should continue to experience population growth given the area's low cost of living, warm climate, and ample employment opportunities.

Rio Rancho Population

Rio Rancho Historical Housing Starts

Source: U.S. census

AMREP's Rio Rancho Land Base: AMREP owns approximately 18,000 acres in Rio Rancho, New Mexico. The quality and value of the land vary dramatically based on location, contiguity, and status of entitlements. AMREP divides its land holdings based on whether the land is in an active subdivision and further divides the land based on whether it is contiguous. As of July 1, 2020, AMREP owned 905 acres of land in Rio Rancho in the Company's active subdivisions. In addition, AMREP owns 3,400 acres of land in Rio Rancho where the Company has 90%+ contiguous ownership, 5,100 acres were AMREP has over 50% contiguous ownership, and 8,500 acres were in areas with less than 50% contiguous ownership. A summary of the land holdings is provided below:

AMREP Land by Property Type

Source: Company filings

AMREP generates revenue by selling developed and undeveloped land to homebuilders, commercial developers, and industrial developers. AMREP increases the value of its land by planning sites, obtaining entitlements, installing utilities, and improving roads and other necessary infrastructure. More recently, AMREP has also constructed build-to-suit commercial buildings that can either be sold for upfront proceeds or retained for recurring rental payments. AMREP also recently launched a homebuilder subsidiary called Amreston to help the company monetize non-contiguous land or land that might be on sites that are too small to interest national homebuilders. Over time, AMREP has experienced significant success in monetizing both developed and undeveloped land. Since, 2005, AMREP sold an average of 45 acres of developed land annually at an average price of $300,000/acre. The pace of developed land sales increased recently, and the price/acre has steadily increased and recently surpassed $450,000/acre in Fiscal Q1 2021. AMREP has also sold almost 200 undeveloped acres annually for an average cost of $20,000/acre. The pace of undeveloped land sales has slowed in recent years but is expected to recover as the pace of development in Rio Rancho continues to increase.

AMREP Sales of Developed and Undeveloped Land by Fiscal Year

Source: Company filings

AMREP's Subdivisions: AMREP owns seven residential subdivisions in Rio Rancho including Lomas Encantadas, Hawk Site, Enchanted Hills, Paseo Gateway, North Hills, Mariposa, and Vista Entrada. Additionally, AMREP also owns a residential subdivision in Santa Fe called Tierra Contenta and a subdivision just north of Albuquerque called Lavender Fields. Before developing any lots, AMREP enters into contracts with homebuilders or other developers who agree to purchase the developed lots at a specified price. AMREP has relationships with national and regional homebuilders including DR Horton, Pulte, Hakes Brothers, Raylee Homes, Twilight Homes, Lifestyle Homes, and Abrazo Homes. Further details on the individual subdivisions are provided below.

Lomas Encantadas: Lomas Encantadas is a 430-acre subdivision located in the eastern section of Unit 20 in the City of Rio Rancho. At completion, Lomas Encantadas is planned to have 1,496 lots, of which 787 have been previously sold by AMREP. Lomas Encantadas has proven to be a popular location, with homebuilders including Hakes Brothers, Abrazo, and Express Homes (DR Horton) active in the subdivision. AMREP has sold approximately 100 finished lots each year (approximately 5 lots/acre) from Lomas Encantadas for an estimated $75,000 per lot. I expect a similar pace to continue for the next 5 years.

Lomas Encantadas

Hakes Brothers Home: 1,742sf, 4br for $282,990

Source: AMREP Southwest and Hakes Brothers

Hawk Site: Hawk Site is a 460-acre subdivision located in the northern section of Unit 25 in Rio Rancho. As of July 1, 2020, Hawk Site was planned to have 1,359 residential lots of which 357 were previously sold by the company. Active homebuilders in Hawk Site include D. R. Horton, Hakes Brothers, and MTV Enterprises. AMREP sold approximately 70 finished lots from Hawk Site in fiscal 2020 for an estimated $70,000/lot. I expect that pace to increase in fiscal 2021 as development is completed on additional sites including the Mountain Hawk development for D. R. Horton. In addition to the residential development, Hawk Site is also entitled for 130 commercial/industrial acres. Hawk Site's location on Highway 550 could make the location desirable for both commercial development and industrial development (including warehouse and logistics locations).

Hawk Site

D.R. Horton Home, 2,078sf, 4br for $283,990

Enchanted Hills/Commerce Center: Enchanted Hills is a 1,320-acre subdivision located in the eastern section of Unit 20 in Rio Rancho. As of July 1, 2020, Enchanted Hills was planned to have 2,982 residential lots, of which, 2,912 residential lots were previously sold. Enchanted Hills has been a highly successful subdivision that features a combination of residential and commercial development just south of Highway 550. AMREP has recently converted several pieces of unused commercial-zoned lots into residential lots that are more marketable in the current environment.

In addition to the 70 remaining residential lots, AMREP owns 35 acres of valuable commercial real estate known as Commerce Center. Commerce Center is located on the southwest corner of Highway 550 and Highway 528. The property is adjacent to a Home Depot and borders several other retail and restaurant establishments. Additionally, Commerce Center is located kitty corner to the Santa Ana Star Casino Hotel, the largest casino in the area. Commerce Center is one of the most valuable individual pieces of property held by the Company. Commercial lots in the area are priced at $225,000-$500,000/acre, and these comparable properties are in less desirable locations. In 2017, AMREP reached a tentative agreement with Premiere Theaters to construct a movie theater along with additional retail and food and beverage at the site, but the deal fell through. More recently, a 240-unit apartment building called 550 Paseo Apartments has been approved only blocks away and several other commercial sites in the area have been constructed. Both AMREP and the City of Rio Rancho (for tax purposes) are motivated to pursue a development at Commerce Center, and the location would be ideal for retail, hospitality, or a mixed-use development.

Commerce Center (35 Acres)

Comparable Listed Commercial Properties

Paseo Gateway: Paseo Gateway is a 298-acre subdivision located in the southern section of Unit 20 in Rio Rancho. Development work has not yet commenced on Paseo Gateway. The subdivision is located on one of the main roads in Rio Rancho (Paseo Del Volcan) and is located just east of Cleveland High School, City Hall, and the University of New Mexico Sandoval Regional Medical Center. The delay in development activity is related to the requirement for a water tower to be constructed in the vicinity. Construction timing remains uncertain, but the success of several subdivisions in the neighboring area suggests that Paseo Gateway would be successful if it were to move forward.

North Hills: As of July 1, 2020, AMREP had 12 finished lots and 7 lots under development in the North Hills subdivision in the eastern section of Unit 12 in Rio Rancho. These lots will all likely be utilized by Amreston for the Company's internal homebuilding activities.

Mariposa: As of July 1, 2020, AMREP owned 4 acres in the Mariposa subdivision that is expected to be developed into 25 residential lots and one commercial lot. This property is located within the larger Mariposa subdivision, a higher-end subdivision located in northern Rio Rancho. All lots are being developed and should generate strong demand.

Vista Entrada: AMREP owns 3 acres of land in the Vista Entrada subdivision in Rio Rancho. The property will be subdivided into 12 lots and Amreston is expected to construct homes at Vista Entrada.

Tierra Contenta: AMREP owns 5 acres of land in the Tierra Contenta subdivision in the city of Santa Fe, New Mexico. The property is expected to be developed into 50 residential lots with all lots currently under development.

Lavender Fields: In June 2020, AMREP purchased 28 acres in Bernalillo County (just north of Albuquerque) for a deferred purchase price of $1.8 million ($68,000/acre) for the development of 82 lots finished lots. The cash outflow associated with the purchase is deferred with $919,166 due June 15, 2021, and an additional $919,166 due June 15, 2022. The property is located in an artsy enclave of Albuquerque and should be in high demand.

Historical Lot Sales and Forecasts: As noted earlier, the housing market in Rio Rancho has strengthened in recent years and has improved dramatically thus far in 2020. I utilized data from the Company's annual reports to estimate the pace of lot sales for each of the Company's subdivisions. I also forecasted Fiscal 2021 and Fiscal 2022 lot sales based on housing start data and estimates for development activity in each area. I expect lot sales to increase to 250 lots in Fiscal 2021 and to increase further in Fiscal 2022 as the Lavender Fields subdivision north of Albuquerque and the Tierra Contenta subdivision in Santa Fe are fully developed. I have also talked to developers in the area that has noted the shortage of developed lots in the area has caused the price of finished lots to increase 10-15%. The stronger demand should increase both revenues and gross profits margins in future periods.

AMREP Lot Sales Forecast by Subdivision

Source: Company filings and my estimates and forecasts

In addition to the developed lot proceeds, AMREP also generates revenues from public improvement districts over a portion of the Lomas Encantadas subdivision and Enchanted Hills subdivisions. The public improvement district reimburses AMREP over a 30-year period for infrastructure investments AMREP made in the subdivisions. These payments commenced in 2020 and are funded from a special tax on homeowners within the district. AMREP has also instituted a private infrastructure reimbursement covenant on a portion of the property at the Hawk Site subdivision. Similar to a public improvement district, certain homeowners in Hawk Site will pay a special levy to reimburse AMREP for infrastructure improvements made to the subdivision. The special levy for Lomas Encantadas and Enchanted Hills will be approximately $1,000/year per home. In fiscal Q1 2021, AMREP generated $308,000 in revenues from these infrastructure reimbursement programs. AMREP could generate over $1 million in fiscal 2021 and this high-margin, recurring revenue stream should continue to grow as more homes are constructed within these subdivisions.

Starbucks and Natural Grocers - Design/Build Projects: Since my initial publication, AMREP has successfully constructed two commercial buildings on Company-owned land. These projects added significant value and provided AMREP with the opportunity to either sell the buildings to other commercial real estate investors or retain the buildings and collect a recurring stream of revenues. In 2016, AMREP constructed a Starbucks on the Company's commercial property at 951 NM Hwy 528 SE in Rio Rancho and leased the property to Starbucks. AMREP financed the construction with a $900,000 loan and ended up selling the property for $2.5 million later that year (sold at a 4% cap rate). In 2020, AMREP constructed a Natural Grocers grocery store at 921 NM Hwy 528 SE (next door to the Starbucks) for an estimated construction cost of $2.3 million. AMREP entered into a 15-year triple-net lease with Natural Grocers resulting in net operating income of $332,328 in year one with a 6% escalator every 5 years. The building is currently being marketed for sale for $5.7 million (a 5.75% cap rate) and recently went under contract. Importantly, AMREP has a large portfolio of additional commercial land that is suitable for these types of projects. While I approve of monetizing these properties at historically low cap rates, investors should note that AMREP has the opportunity to build a portfolio of commercial properties with recurring income. In today's yield-hungry environment, a portfolio of yielding commercial properties could be highly attractive to equity investors.

Starbucks Restaurant

Natural Grocers Grocery Store

Source: Google Maps, LoopNet

Value of 17,000 Acres of Additional Land: In addition to the Company's current subdivision developments, AMREP continues to own over 17,000 acres of additional land in Rio Rancho. The actual location of AMREP's land holdings outside of the Company's named subdivisions can be difficult to track down. I utilized a website called landgrid.com to find the exact location of most of the Company's land. Most of the Company's land in Rio Rancho is held by two wholly owned subsidiaries: AMREP Southwest and Outer Rim Investments. AMREP Southwest owns 5,983 acres primarily located on the north end of Rio Rancho with some additional properties on the western side of the city. Outer Rim Investments owns 7,377 acres of land primarily west of the city on land that is currently undeveloped. AMREP is by far the largest landowner in the area and any future development plans in western Rio Rancho will require use of the Company's land base.

AMREP land owned by AMREP Southwest

AMREP Land Owned by Outer Rim Investments

Source

I expect AMREP to move forward with additional subdivisions in future years. AMREP has already applied for a preliminary plat at a new subdivision called Papillon Village, located near the Mariposa subdivision. Papillon Village is designed to be a 389-acre residential community with 1,107 lots. While further residential development in Albuquerque and Santa Fe is limited due to lack of developable land, the City of Rio Rancho continues to have significant land to expand and is expected to be able to hold up to 500,000 residents, over 5x the city's current size. While a large amount of AMREP's land is non-contiguous, legislature has been proposed to allow for eminent domain policies to consolidate the land base and encourage future development. It is also possible for AMREP to consolidate land ownership in the area by purchasing or partnering with owners of other scattered lots in the area. In addition to being used for residential developments, the Company's land could be marketed as alternative energy sites including solar or wind farms. A 50-megawatt solar facility was recently completed west of Rio Rancho to provide electricity for a Facebook data center and future projects could provide additional demand for the Company's land. AMREP also holds 55,000 acres minerals rights of land in the Rio Rancho area. Prior seismic work indicates there could be substantial hydrocarbon reserves in the area and Sandridge Energy was prepared to drill an exploratory well in the area in 2015. Ultimately, Sandoval County did not approve the drilling and future progress on gaining government approval will likely be delayed until oil prices are substantially higher. Finally, AMREP could look to sell land that the Company does not plan to develop over the next 10 years. Many investors are concerned about inflation in the current low-interest rate environment and land ownership could be seen as an inflation hedge with the additional optionality to capitalize on the long-term growth prospects of Rio Rancho. Ultimately, the Company's additional 17,000 acres of land is a valuable asset with significant optionality that could be monetized through residential development, alternative energy facilities, hydrocarbon production, or a one-off sale.

Homebuilding Initiative (Amreston):

In fiscal 2020, AMREP launched Amreston, the Company's own homebuilding subsidiary. AMREP previously had its own homebuilding subsidiary in the 1990s and was a leading homebuilder in Rio Rancho before electing to close the operation to focus on developing finished lots. Rather than looking to compete with national homebuilders, Amreston's current strategy is to utilize AMREP's base of small contiguous lots of land as well as scattered single lots for homebuilding activities. In addition to large subdivisions such as Lomas Encantadas and Hawk Site that are ideal for large national homebuilders, AMREP also owns many smaller tracts of land and numerous scattered single lots throughout Rio Rancho. Large homebuilders are generally not willing to build on smaller tracts of land and will almost always avoid working on scattered lots as they are not able to capture the appropriate economies of scale. Amreston's access to low cost land provides it with a competitive advantage, and Amreston has designed its business model to generate positive gross profits even after accounting for the full cost of the land. In addition to generating additional gross profits and monetizing land parcels that were previously difficult to market, Amreston also provides the Company with another potential market for the Company's finished lots, increasing competition (and potentially pricing) for the Company's land.

Amreston currently has two listed subdivisions on its website: Moonlight Hills and The Villas. Moonlight Hills is a 12-unit subdivision within AMREP's North Hills subdivision located at the corner of Meadows Boulevard and Night Sky Avenue across the street from the Colinas Del Norte Elementary School. Each unit is designed as a 3-bedroom townhome with an average retail price of $210,000. Construction on the first unit began in March 2020 and the subdivision is currently sold out (1 home sold and 11 pending for sale). By tracking the city's housing start data, I believe the average construction costs of each unit is approximately $135,000, providing for $75,000 of gross profit per house excluding the historical cost basis of the land (36% cash gross margin). Moonlight Hills should begin contributing to sales and profitability starting in Fiscal Q2 or Fiscal Q3 2021 as houses that were previously listed as pending for sale are closed.

Moonlight Hills Subdivision

Moonlight Hills Home Status

Source: Amreston.com, Zillow.com, www.rrnm.gov

Amreston's Facebook page recently highlighted further homebuilding activity in three additional subdivisions: The Villas, Parkview, and Vista Entrada. Thus far, only The Villas has been highlighted on the Amreston website. The Villas is a 35-unit community located within the Enchanted Hills subdivision. Amreston has filed housing starts for five units within The Villas with an average construction cost of $151,000. Parkview is a 7-unit development near Moonlight Hills and Vista Entrada is a 12-unit development. In addition to these communities, Amreston also filed for a housing start at 6896 Nacelle Road, which is a single lot location just south of the Lomas Encantadas subdivision. This location could serve as a showhome for potential buyers that are considering a home on one of AMREP's other single lots. Given the large number of single lots within AMREP's land portfolio, constructing homes on single lots provides an additional avenue to generate revenues and cash flows on a lot that would otherwise be challenging to market to a national homebuilder.

The Villas Subdivision

The Villas Overhead View South of Highway 550

Source: Amreston and Google Maps

While still in the early phases, Amreston could add substantial value to the Company over the long term. Amreston's product appears to have been very well-received by the community. Amreston's Moonlight Hills subdivision won three awards in the Parade of Homes annual homebuilder award show. Perhaps more importantly, the awards were highlighted in an article in the Rio Rancho Observer, providing some free publicity for the new division and attesting to the potential for the new segment. AMREP's large base of owned lots will continue to provide Amreston with a long runway of finished lots in desirable locations without the large capital outlay that traditional homebuilders must overcome. Amreston could sell 30-50 homes annually based on their lot availability and internal capabilities with the potential to increase this figure as Amreston's reputation improves. I forecast the average home to retail for $250,000 with an average gross margin of 30% (including the gross margin on the underlying land). Should Amreston sell 40 homes annually, the segment would generate $10 million in revenues and $3 million in additional gross profit.

Parade of Homes Awards for Amreston

Rio Rancho Observer Article

Source: Amreston.com and Rio Rancho Observer

Homebuilder Returns: It is likely well-known by many readers that U.S. homebuilders have performed very well this year as homebuilding activities were widely considered to be essential services and demand for single-family homes soared as residents fled the cities. While AMREP's shares are flat thus far in 2020, the shares of the national homebuilding companies have been strong performers.

AMREP Share Price Performance versus Homebuilders

Source: Yahoo! Finance

Despite this strong performance by homebuilders, one factor that has restricted homebuilder performance is the lack of available finished lots. AMREP has benefitted from this dynamic, as demand has increased for the Company's finished lots, resulting in more sales and increased pricing power. This should ultimately allow the landowner and developer to capture a portion of the economic value from higher demand for residential properties. Some recent quotes from executives of three national homebuilding companies attesting to the scarcity and value of finished lots are provided below.

As I've noted in prior calls, it is challenging at best to materially ramp production in this labor-constrained market and it's even more challenging to replace entitled land in this land-constrained market."

- Stuart Miller, Lennar Executive Chairman, Q3 2020 Earnings Call

The land price has gone up, absolutely, they have."

- David Auld, DR Horton CEO, Fiscal Q4 2020 Earnings Call

I don't know that I've ever seen land go on sale. It just doesn't. And there is a finite number of pieces that are within kind of the zones that are allowed to be kind of developed entitled, et cetera. And I think we see competitive behavior there, whether it's from other homebuilders or you've got commercial and other uses for most good land parcels."

- Ryan Marshall, Pulte CEO, Q3 2020 Earnings Call

Exit from Fulfillment Services Segment:

In addition to the Company's real estate assets, AMREP previously operated a Fulfillment Services segment. Operating under the Palm Coast Data brand, the segment performed fulfillment and contact center services, including subscriber list and database management, payment and order processing, subscriber mailing services, and product fulfillment warehousing. One of the segment's target customers were magazine publishers, and the segment had entered a period of secular decline as magazine circulation decreased. In April 2019, AMREP entered into a transaction with private equity firm Irish Studios to sell the segment for $1 million in cash combined with an agreement for Irish Studios to lease AMREP's two buildings in Palm Coast, Florida for annual rent of $1.9 million/year for 10 years. The deal proved to be poorly structured, with AMREP having little recourse against Irish Studio in the event of default on rental payments. In November 2019, AMREP entered into an agreement to sell the two buildings to a third-party buyer for $18 million, but that deal fell apart after Irish Studios defaulted on its rental payments in December 2019. Irish Studios later agreed to purchase AMREP's building at 11 Commerce Boulevard for $12.5 million but also defaulted on this purchase following the onset of COVID-19. AMREP, ultimately, agreed to a settlement with Irish Studios with AMREP receiving approximately $2 million in settlement payments in exchange for terminating the rent agreement. The legacy buildings at 11 Commerce Boulevard and 2 Commerce Boulevard are on the market for a total of $13.75 million (more on this later) with the discount from the original purchase price likely attributed to the buildings being unoccupied with no current income. Despite this less-than-ideal outcome, AMREP successfully exited a business in secular decline. AMREP is now solely focused on real estate development, and the focus should both help investors understand the Company and make the remaining assets more attractive to a potential acquirer.

Hidden Assets: In addition to AMREP's ongoing land development and homebuilding operations in Rio Rancho, AMREP holds four valuable parcels of hidden assets that are currently listed for sale along with an additional residential development that could be listed for sale in the next twelve months. Additionally, the Natural Grocers building is currently under contract for an estimated sales price of $5.7 million. While it is challenging to predict when the Company's other listed locations might sell, the listed prices of the four parcels is $24 million, representing almost 2/3 of the Company's current enterprise value. A compilation of the listed real estate along with a further description of each of the properties is provided below.

AMREP Hidden Assets

Source: Margaret Sheehan, My estimates

Natural Grocers Building: In 2020, AMREP constructed a building for Natural Grocers on one of AMREP's commercial lots on Highway 528 in Rio Rancho, New Mexico. AMREP spent approximately $2.5 million on construction, and the building was completed in August 2020. The building is leased to Natural Grocers under a 15-year triple net lease for $332,000 with a 6% escalator every 5 years. While AMREP is likely comfortable receiving this recurring revenue, the building is currently listed for sale for $5.8 million, equating to a 5.75% capitalization rate. The listing was recently changed and the building is currently listed as "under contract", suggesting a monetization could be occurring in the near term. Even if the building is not sold, AMREP will continue to receive an attractive stream of recurring income. The successful construction of the Natural Grocers buildings provides evidence of alternatives AMREP has for maximizing the value of the Company's other commercial real estate holdings.

Natural Grocers, Rio Rancho

Natural Grocers - Overhead View

Source

11 Commerce Boulevard and 2 Commerce Boulevard in Palm Coast, Florida: Following AMREP's sale of Palm Coast Data in May 2019, AMREP continued to own the buildings at 11 Commerce Boulevard and 2 Commerce Boulevard in Palm Coast, Florida. Palm Coast is located on the Atlantic Coast between Orlando and Jacksonville, two booming real estate markets. I have toured both buildings during a diligence trip in 2019 and found them both to be well-maintained. AMREP's building at 11 Commerce Boulevard is currently listed for sale at $8 million. The industrial facility has 143,000 square feet consisting of 37,000 square feet of office space and 106,000 square feet of warehouse or industrial space. The building is located on 17.5 acres of land, contains 170 parking spaces and has approximately 10 acres of excess land available for future expansion. The office building was built in 1989 with additional warehouse space added in 1997 and 1998. Of particular note, 87,503 square feet of warehouse space has 32' ceilings, making it an ideal location for a distribution or warehouse facility. Demand for these types of buildings has been very strong recently as companies expand look to expand their e-commerce and distribution capabilities. AMREP also owns the building and underlying land at 2 Commerce Boulevard, which is listed for sale at $5.75 million. The 61,000 square foot building contains 47,400 square feet of office space and an additional 13,000 square feet of warehouse or light industrial space. The building is located on 10 acres of land and has 120 parking spaces. The building was built in 1985. In 2009, AMREP purchased the building from the City of Palm Coast for $3 million, which at the time was considered part of a sweetheart deal to attract jobs to the area. Although neither building is currently occupied, the quality of the buildings, attractive location (located one hour from both Orlando and Jacksonville), and demand for industrial space make them attractive to potential buyers. I value the pair at $12 million.

Overhead of 11 and 2 Commerce

11 Commerce: Listed at $8mn

2 Commerce: Listed at $5.75mn

Source

Colorado Property for Sale: AMREP previously had substantial operations in the state of Colorado and continues to own two valuable properties in Colorado. The first is a 4.5 acres commercial lot in Parker, Colorado. The lot is located on the corner of Mainstreet and Jordan Road. The lot is listed for sale at $4,356,000, or almost $1 million/acre. Parker is a southeast suburb of Denver and one of the fastest-growing cities in the nation. Parker recently ranked second nationally in the money.com list of best places to live in America. The lot is located in a well-developed area of town and is surrounded by residential and commercial developments. Additionally, the 4-acre lot south of the site is expected to be used to construct a senior living facility. The city of Parker also recently approved a zone change for the open space on the block east of the lot to allow for additional residential and commercial development. I expect AMREP to look to sell this site but also believe that the growth characteristics of Parker, Colorado suggest any development conducted by AMREP at this location has a high probability of success. An overview of the property is provided below.

AMREP 4.5 Acre lot On Mainstreet and Jordan Road

Source

AMREP also continues to own a 167-acre residential subdivision in Brighton, Colorado called Mountain View Estates. Brighton Colorado is a rapidly-growing Denver suburb that is located about 20 miles northeast of Denver and 15 miles from Denver International Airport. Mountain View Estates is located on Telluride Street between Bridge Street and 168th Street and is sandwiched between several other residential developments. Although the subdivision was approved in 2013, water pooling problems at a neighboring subdivision have prevented AMREP from moving forward with either developing or selling the property. The City of Brighton is currently working to remedy the problem and AMREP should be able to proceed with either a development or sale within the next twelve months. Similar land in the Brighton area is listed for sale between $25,000 and $55,000/acre. I have assigned a value of $25,000/acre to the property for a total value of $4.2 million.

Mountain View Estates

Comparable Land for Sale by Brighton, CO

Source: CBRE and Zillow.com

Mineral Rights: In addition to the 167 acres of land AMREP owns in Brighton, Colorado, the Company also owns mineral rights under approximately 147 surface acres in Brighton. In 2016, AMREP leased these mineral rights to Great Western Petroleum for an upfront fee of $128,000 and a 18.75% royalty interest for oil and gas produced from the property. Great Western Petroleum combined AMREP's 147 acres into a 1,240-acre pool of minerals rights resulting in Great Western owing AMREP 1.42% of the oil and gas proceeds from the pooled resource. In 2019, Great Western drilled and completed multiple wells on a pad site to exploit the hydrocarbons located in the pooled resource. In fiscal 2020, AMREP received $608,000 of royalties from the pooled property. Although AMREP's royalties in Q1 of fiscal 2021 fell to just $11,000, the decline can likely be contributed to the decline in energy prices and the potential shut-in of several existing wells. There are additional wells that were drilled on the pad site that has not yet been completed, and AMREP could again receive meaningful royalties if energy prices were to recover.

Share Repurchases: In September 2020, AMREP announced a share repurchase program enabling the Company to purchase up to 1 million shares with total expenditures not to exceed $5 million ($5/share). The repurchase program marked a notable shift in the Company's capital allocation policy, which had previously been focused on reducing debt and accumulating cash. AMREP wasted little time in putting the program to work. On October 27, 2020, AMREP purchased 675,616 shares of common stock for $6.18/share, representing 8.3% of outstanding shares. I believe the seller was Bauer Media Group, a German media company that received the shares in 2014 in exchange for receivables that were due from AMREP's previously owned media subsidiary. Bauer had previously been a known seller of AMREP shares and repurchasing Bauer's shares likely removed an impediment that had artificially restricted the Company's share price. On November 6, 2020, AMREP purchased an additional 143,482 share at $6.18/share. In total, AMREP purchased 830,945 shares (10.2% of outstanding stock) for $6.18 in a 14-day period. This repurchase activity highlights a shift in Company philosophy and a willingness to return excess cash to shareholders.

Balance Sheet: As of July 31, 2020, AMREP had a strong balance sheet consisting of $17.0 million in cash and just $5.5 million of debt for a net cash position of $11.5 million. Following quarter-end, AMREP purchased 830,945 shares for $5.1 million ($6.18/share) in two separate transactions. These share repurchases reduced the Company's quarter-end cash balance to $11.9 million and the net cash balance to $6.4 million. The Company's debt balance consisted of a $2.3 million floating note that was utilized to construct the Natural Grocers grocery store and will likely be repaid in the event the sale is finalized. AMREP also has $1.0 of debt outstanding for the development of finished lots at the Lomas Encantadas and Hawk Site subdivisions. AMREP also has a $1.8 million zero interest loan due to the prior owners of the Lavender Fields subdivision. AMREP also has a post-retirement liability of $5.0 million associated with the media segment that was previously operated by the Company. AMREP contributed a total of $5.6 million to the pension in Fiscal 2019 and 2020 which reduced operating cash flows in those years. The Company does not expect to make any additional pension contributions for the foreseeable future. AMREP currently has a tangible equity value of $85.4 million or $10.97/share. Much of the Company's land portfolio was acquired in the 1960s and 1970s and has likely appreciated in value over time due to both inflation and economic development in Rio Rancho. As of April 30, 2020, AMREP had $17.8 million in Federal net operating loss carryforwards resulting in a deferred tax asset of $3.7 million (offset by a full valuation allowance). While not explicitly included on the balance sheet, these tax offsets should fully offset any taxable gains generated on the sale of the Company's hidden assets as well as reducing the Company's tax liability on future operating income.

Management Team and Board of Directors: AMREP is led by CEO Chris Vitale, who was promoted to CEO in 2018 after serving as the Company's Chief Administrative Officer. Prior to Chris's appointment, AMREP did not have a full-time CEO and was instead led by a three-person Executive Committee that had oversight of the Company's businesses. The appointment of Mr. Vitale is a notable improvement over the prior structure. AMREP has a 3-person board of directors consisting of Mr. Edward Cloues (Chairman), Albert Russo, and Robert Robotti. While Mr. Cloues holds a minimal number of shares, Mr. Russo and Mr. Robotti control 17.6% and 6.3%, respectively. Mr. Cloues has also recently increased his holdings by purchasing 5,500 shares in the open market after quarter-end. AMREP's largest shareholder is Nicholas Karabots, a successful media and real estate investor that owns 28.6% of shares. Gate City Capital (my firm) owned 19.8% of shares as of the most recent filing.

Financial projections: As part of my valuation process, I forecasted financial results for the Company's two segments. I project AMREP will sell 40 acres of developed residential land in Fiscal 2021 and 55 acres of developed residential land in Fiscal 2022 for an average sale price of $425,000/acre. Additionally, I expect the Company to sell 15 houses in Fiscal 2021 and 32 in Fiscal 2022 at an average price of $215,000 and $250,000 respectively. I expect AMREP to generate an additional $1.0 million in revenues each year through the receipt of public improvement district reimbursements. I expect total revenues to increase to $23 million in Fiscal 2021 and to surpass $30 million in Fiscal 2022 as the AMREP develops additional subdivisions and the Company's homebuilding operations grow. While not included in the forecast, AMREP also has the potential to generate revenues through the sale of any of the Company's $24 million in listed property or through the development or sale of the Company's commercial acreage. I expect AMREP to generate 20% gross margins on its land sales and 35% gross margins on its housing sales, for combined gross margins of 25-30%. Total SG&A is estimated at $5.5 million in Fiscal 2021 and $6.0 million in Fiscal 2022, resulting in operating income of over $1.0 million in Fiscal 2021 and over $3.0 million in Fiscal 2022. These results are a sharp improvement from recent years, and I expect will draw considerable attention from the investor community.

Valuation: I valued AMREP on a sum-of-the-parts valuation based primarily on a DCF analysis of the Company's segments combined with the Company's other assets and liabilities. I valued the Company's land development and homebuilder operations in Rio Rancho at $51.6 million, implying a valuation of just $3,000/acre. I also added the expected value of the assets currently held for sale and subtracted the pension obligation to obtain a target Enterprise Value for the Company of $75.2 million. I added $6.5 million of net cash to obtain a target market capitalization of $81.7 million and a target share price of $11.16, suggesting potential upside of over 90%. The details are provided below.

Comparable analysis: I compared AMREP's valuation to other companies with significant real estate holdings. The Company's valuation appears attractive versus its peers. Additionally, the valuation metrics do not account for the $24 million of assets that are currently listed for sale.

Risks: There are several notable risks to the Company's business that should be highlighted:

  • AMREP's ability to monetize its real estate holdings in Rio Rancho is dependent on the health of the real estate market in the Albuquerque/Rio Rancho area and a downturn in the market or local economy would negatively impact results.
  • Amreston is a new business for AMREP and financial results might not meet expectations.
  • Rising interest rates could decrease demand for new homes and developed lots.
  • The monetization of hidden assets that are listed for sale and under contract might not occur in a timely manner or at my forecasted prices.
  • AMREP has a pension liability which decreases the Company's financial flexibility.

Conclusion: Based on my sum-of-the-parts valuation of AMREP, I obtained a target valuation on the Company of $11.16, representing potential upside of +91%. The Company's valuable New Mexico real estate has been overlooked by investors with the market valuing the Company at a fraction of the book value of its land holdings. The continued improvement of the New Mexico real estate market should generate significant cash flow for the Company and help investors refocus on the value of the underlying land. In addition, Amreston has successfully launched and should generate additional profits and cash flows for the Company in the years to come. Finally, the Company's $24 million in listed real estate (including $5.75 million under contract) along with substantial mineral rights in both Colorado and New Mexico provide additional value. The combination of valuable land holdings, several hidden assets, and an unlevered balance sheet provide investors with both upside potential and a considerable margin of safety.

Gate City Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. This research report expresses our research opinions. Any information contained in this report may include forward looking statements, expectations, pro forma analyses, estimates, and projections. These types of statements, expectations, pro forma analyses, estimates, and projections may turn out to be incorrect for reasons beyond Gate City Capital Management, LLC's control. Be sure to first consult with a qualified financial adviser and/or tax professional before making any investment decision with respect to securities covered herein. Following publication of any presentation, report or letter, we intend to continue transacting in the securities covered therein, including any purchases or sales, for any time hereafter regardless of our initial recommendation. All expressions of opinion are subject to change without notice, and Gate City Capital Management, LLC does not undertake to update this report or any information contained herein. Past performance is not indicative of future results.

This article was written by

Nicholas Bodnar profile picture
3.69K Followers
Research Analyst at Gate City Capital Management focusing on micro-cap deep value opportunities. Not nearly as active on here anymore. Feel free to message if you want to chat.
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Disclosure: I am/we are long AXR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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