Description

Amrep Corp (AXR) is a real estate and media services conglomerate with a market cap of ~$55 million. We believe AXR is worth no less than $30 per share based on 6.5x FY2012 EBITDA for its subscription / fulfillment services business and 2-2.5x tangible book of the company’s real estate business. We believe this is a reasonable multiple of tangible book value because Amrep’s Rio Rancho land was originally acquired in 1961 and 1971 at less than $200 an acre, resulting in a wildly understated cost basis. AXR averaged $62,000 per acre sold from 2008-2012. Similarly situated companies with low-cost land holdings, such as TRC, JOE, and CTO, trade at 1.7-3.4x tangible book vs. AXR’s 0.8x. As an added bonus, AXR’s subscription / fulfillment business, which is not represented in book, generates $1.00 in EBITDA per share. Therefore, after placing a 6.5x multiple on FY2012 EBITDA and a 2.2x multiple on tangible book of $11.00 (which we think still undervalues the real estate, more later), we value AXR at $30.20 per share. In 2006, IBD rated AXR its #1 idea and the stock reached $135. In the bubble days of 2007, AXR sold 1/20^th of its total land holdings and generated nearly $66 million in EBIT (pre-tax $10 per share).

Media Services

To state the obvious, the magazine logistics business has faced tremendous challenges over the past 5 years. Amrep Corp.’s $92M acquisition of Palm Coast Data (PCD), which the company purchased in 2006 to augment its smaller, media distribution business Kable, was ill-timed to say the least. The environment remains challenging today, with volumes dropping ~10% on a year-over-year basis. Cash flow at PCD is down 20% since AXR’s purchase, and we expect this trend to continue in the near term. There is also an underfunded pension obligation. However, magazine distribution and payment processing is not as terrible of a business as one might expect. It has a high degree of complexity and considerable switching costs with reasonable economics. For instance, PCD processes 30 million pieces of mail and handles 300 million inbound calls per year, simultaneously managing collections and remitting payment in 48 hours for 700+ magazine brands (http://www.palmcoastdata.com/page/performance-scorecard). CDS (Hearst) and PCD together control 80% market share and PCD has established itself as the low-cost leader. Furthermore, the tide may be starting to turn. The company renewed 100% of customer contracts over the past 12 months. New CEO Ted Gaasche was formerly the CEO of SunGard Availability Services, the second-largest division at SunGard with over $1 billion in annual revenue. He and his team are exploring a range of new potential revenue streams, ranging from digital media services to warranty processing. Management has done a commendable job keeping expenses in line with reduced revenue. Given high variable costs, we feel Amrep has additional room to cut costs should revenue continue to decline. With an implied enterprise value of ~40 million, we conservatively estimate this business is worth about 40% of what AXR paid for PCD alone just 6 years ago.

Real Estate

Amrep purchased 54K acres outside Albuquerque in 1961 and another 37K between 1969 and 1971, paying about $195 per acre when all was said and done. Since 1961, the city of Rio Rancho has developed into New Mexico’s third-largest city with a population of ~ 90K. Rio Rancho is part of the Albuquerque metropolitan area (population 877K) and home to Intel’s third-largest semiconductor fabrication facility. Other major employers include HP, Alliance Data Systems and Bank of America. There are two hospitals built in the last year at a cost of $500 million. The city boasts one of the newest (founded in 1994) and best school systems in the state featuring 8 new schools in 8 years at a total cost of $800 million (shocking!). Rio Rancho was recently ranked the 58^th best small city in the US by CNN Money.

While AXR’s real estate is tough to value, we’ve tried several approaches. We think AXR’s AXR Rio Rancho holdings are currently reasonably valued in the $120-140 million range based, in part, on the following data points.

A)      We visited in late 2010 and, in a meeting with the mayor, asked if there were any publicly available documents on assessed tax values of AXR’s land holdings. We found this data is only available in person (no one had ever requested before) and spent 5 hours pulling data on 21,740 lots. The total tax assessment in 2010 on AXR land was $191 million or $31.88 per share. We think this is high.

B)       Comparable companies are valued at an average of 2.4x tangible book. We believe 2.2x book is a reasonable valuation for AXR’s land inventory ($22.40 per share).

 At $120 million, the implied per-acre value is roughly $6,900. The current assessed property valuation of the entire city is $2.1 billion (source: City of Rio Rancho). AXR owns 20% of total raw land acreage within Rio Rancho’s city limits. We would note that the compound average value per housing start increased 6.7% in Rio Rancho from 1994 to present (source: City of Rio Rancho). From 1975 to 2011, the value of New Mexico land increased at a compound average rate of 5.9% (source: Lincoln Institute of Land Policy).

In 2006, heffer504 made an outstanding case for shorting AXR. The short worked far better than imagined, as the stock dropped from $70 to $5. Heffer’s downside was $45 based on land valuation of $220 million. With single-family home starts falling 90%, it’s easy to see why the short worked so well. Now the reverse is happening. Even if the market registers no improvement for rest of 2012, single family starts will increase 40% year-over-year.

We spent the past Monday and Tuesday in Rio Rancho with one of the area’s larger land brokers. He has been in business 30 years.  We spent 6 hours looking at numerous properties. One important takeaway from our trip: there’s a multiplier effect associated with infrastructure. Proximity to sewage, gas, electric, and paved roads dramatically increases land value. Few homebuilders are in the business of land speculation. Banks are less willing than ever to lend on raw land and want to get such loans off their books, creating a 100% cash market and driving down prices. In Unit 13, where all necessary infrastructure is in place, 90% of the half-acre lots are asking $50K each. Homebuilders are willing to pay 20-25% of total home value, which averages $175K (with some homes going for $500K+). In contrast, banks need liquidity on raw land holdings that, although likely to be built out over the next few years, are still ¼ to ½ mile away from paved roads and utilities. This land is asking $18K an acre. This same location is under a mile from a recently opened, $250 million hospital and a new, $14 million movie complex, not to mention a Wal-Mart Supercenter, a Walgreens, and a CVS. As infrastructure is built out, we would not be surprised to see these lots appreciate 3x, especially if $200K homes are being constructed. All of AXR’s land is in the city and will eventually be turned into residential, commercial, and industrial properties. Granted, this will likely take 30-40 years. With the city nearly doubling in size every 10 years (Albuquerque can really only expand northwest along the Rio Grande into Rio Rancho due to the Sandia Mountains), we think the rate of land appreciation will significantly outpace inflation.

When all is said and done, we think AXR is worth at least $30. At current prices (~$9.50), buyers are paying 6x FY2012 EBITDA for Palm Coast Data and getting 20% of the third-largest city in New Mexico for free. There are other attractive dynamics at play. With no IR, no conference calls, no road shows and no sell-side coverage for 5+ years, the stock has been left for dead. Also, an 80 year-old director and vice chairman owns 35% of the company. Interestingly, this number is shrinking rapidly as he continues to gift shares to two charities (the Children’s Hospital of Philadelphia and the Franklin Institute). Although this dynamic has created an overhang for an illiquid stock like AXR, we see a wonderful buying opportunity.

Disclaimer: This does not constitute a recommendation to buy or sell this stock. We own shares in this company, and we may buy or sell shares at any time without updating the board.

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