Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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INTRODUCTION
AMREP Corporation
(the “Company”), through its subsidiaries, is primarily engaged in the real estate business. The Company has no foreign
sales or activities outside the United States. All references to the Company in this quarterly report on Form 10-Q include the
Registrant and its subsidiaries. The following provides information that management believes is relevant to an assessment and understanding
of the Company’s consolidated results of operations and financial condition. The information contained in this section should
be read in conjunction with the consolidated financial statements and related notes thereto included in this report on Form 10-Q
and with the Company’s annual report on Form 10-K for the year ended April 30, 2020, which was filed with the Securities
and Exchange Commission on July 27, 2020 (the “2020 Form 10-K”). Many of the amounts and percentages presented in this
Item 2 have been rounded for convenience of presentation. Unless the context otherwise indicates, all references to 2020 and 2019
are to the fiscal years ending April 30, 2020 and 2019 and all references to the first quarters of 2020 and 2019 mean the fiscal
three month periods ended July 31, 2020 and 2019.
CRITICAL ACCOUNTING POLICIES AND
ESTIMATES
Management’s discussion and analysis
of financial condition and results of operations is based on the accounting policies used and disclosed in the 2020 consolidated
financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted in the
United States of America and included as part of the 2020 Form 10-K and in Note 1 of the notes to the consolidated financial statements
included in this report on Form 10-Q. The preparation of those consolidated financial statements required management to make estimates
and assumptions that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.
Actual amounts or results could differ from those estimates and assumptions.
The Company’s critical accounting
policies, assumptions and estimates are described in Item 7 of Part II of the 2020 Form 10-K. There have been no changes in
these critical accounting policies.
The significant accounting policies of
the Company are described in Note 1 to the consolidated financial statements contained in the 2020 Form 10-K and in Note 1 of the
notes to the consolidated financial statements included in this report on Form 10-Q. Information concerning the Company’s
implementation and the impact of recent accounting standards issued by the Financial Accounting Standards Board is included in
the notes to the consolidated financial statements contained in the 2020 Form 10-K and in the notes to the consolidated financial
statements included in this report on Form 10-Q. The Company did not adopt any accounting policy in the three months ended July
31, 2020 that had a material effect on its consolidated financial statements.
The Company adopted the following accounting
policies effective May 1, 2020:
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In August 2018, the Financial
Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair
Value Measurement: Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement. ASU 2018-13 eliminates certain disclosure requirements for fair value
measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure
requirements to improve the effectiveness of disclosures in the notes to financial statements. ASU 2018-13 was effective for
the Company’s fiscal year beginning May 1, 2020. The adoption of ASU 2018-13 by the Company did not have a material
effect on its consolidated financial statements.
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In August 2018, the FASB issued ASU No.
2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure
Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 removes disclosures that
no longer are considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified
as relevant for companies with defined benefit retirement plans. ASU 2018-14 was effective for the Company’s fiscal year
beginning May 1, 2020. The adoption of ASU 2018-14 by the Company did not have a material effect on its consolidated financial
statements.
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RESULTS OF OPERATIONS
For the first quarter of 2021, the Company
recorded net income of $593,000, or $0.07 per share, compared to a net loss of $196,000, or $0.02 per share, for the first quarter
of 2020. Revenues were $4,206,000 for the first quarter of 2021 compared to $4,767,000 for the same period of 2020.
Revenues from land sales were $3,487,000
for the first quarter of 2021 compared to $4,291,000 for the same period of 2020. For the first quarters of 2021 and 2020, the
Company’s land sales in New Mexico were as follows (dollars in thousands):
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Three Months Ended July 31, 2020
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Three Months Ended July 31, 2019
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Acres Sold
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Revenue
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Revenue
Per Acre
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Acres Sold
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Revenue
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Revenue
Per Acre
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Developed
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Residential
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7.7
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$
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3,487
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$
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453
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10
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$
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4,291
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$
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438
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Commercial
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-
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-
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-
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-
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-
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Total Developed
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7.7
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3,487
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453
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10
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4,291
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438
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Undeveloped
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-
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-
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-
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-
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Total
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7.7
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$
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3,487
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$
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453
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10
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$
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4,291
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$
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438
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The average gross profit percentage on
land sales in New Mexico before indirect costs was 23% for the first quarter of 2021 compared to 15% for the same period of 2020.
The profit percentage increase is attributable to the demand for lots by builders resulting in higher revenue per developed lot.
As a result of many factors, including the nature and timing of specific transactions and the type and location of land being sold,
revenues, average selling prices and related average gross profits from land sales can vary significantly from period to period
and prior results are not necessarily a good indication of what may occur in future periods.
Rent revenues were $350,000 for first quarter
of 2021 compared to $341,000 for same period of 2020 from the leasing of the Company’s 61,000 square foot facility and 143,000
square foot facility located in Palm Coast, Florida.
Other revenues were $369,000 for the
first quarter of 2021 compared to $135,000 for the same period of 2020. Other revenues for the first quarter of 2021 primarily consisted
of $11,000 of royalties received during the first quarter of 2021 from oil and gas production with respect to the Company’s
mineral rights in Brighton, Colorado, $133,000 of private infrastructure reimbursements, $175,000 of public improvement reimbursements,
forfeited deposits from customers, amortization of deferred revenue and miscellaneous other income items. Other revenues for the
first quarter of 2020 consisted of $44,000 of forfeited deposits from customers and $91,000 of private infrastructure reimbursements.
Operating expenses for real estate increased
from $559,000 for the first quarter of 2020 to $677,000 for the same period of 2021, primarily due to increased employee hiring
and increased health care benefit costs.
Real estate general and
administrative expenses decreased from $113,000 for the first quarter of 2020 to $41,000 for the same period of 2021,
primarily due to reduced professional fees. Corporate general and administrative expenses decreased from $894,000 for the
first quarter of 2020 to $726,000 for the same period of 2021, primarily due to reduced corporate headcount and lower
consulting and director fees and pension expense.
Interest income, net decreased from
$124,000 for the first quarter of 2020 to $6,000 for the same period of 2021, primarily due to a reduction in interest rates
on cash balances and no interest earned during the first quarter of 2021 on the deferred purchase price related to the sale
of the Company’s fulfillment services business, partially offset by a reduction in interest expense.
Other income for the three months ended July 31, 2020 consisted
of a settlement payment of $650,000 from a former business segment of the Company (refer to Note 2 to the consolidated financial
statements contained in the 2020 Form 10-K for detail regarding the settlement agreement).
The Company had a provision for income
taxes of $146,000 for the first quarter of 2021 compared to a benefit for income taxes of $134,000 for the first quarter of 2020.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary sources of
funding for working capital requirements are cash flow from operations, bank financing for specific real estate projects and existing
cash balances. The Company’s liquidity is affected by many factors, including some that are based on normal operations and
some that are related to the real estate industry and the economy generally. Except as described below, there have been no material
changes to the Company’s liquidity and capital resources as reflected in the Liquidity and Capital Resources section of Management’s
Discussion and Analysis of Financial Condition and Results of Operations in the 2020 Form 10-K.
Operating Activities
Real estate inventory increased from $53,449,000
at April 30, 2020 to $57,216,000 at July 31, 2020, primarily due to increased land development activity, the acquisition of land
and homebuilding construction, offset in part by real estate land sales. Investment assets, net increased from $18,644,000 at April
30, 2020 to $18,798,000 at July 31, 2020, primarily due to capitalization of costs related to the construction of a single tenant
retail building, offset in part by depreciation. Other assets increased from $934,000 at April 30, 2020 to $959,000 at July 31,
2020, primarily due to an increase in prepaid expenses.
Accounts payable and accrued expenses increased
from $3,125,000 at April 30, 2020 to $4,105,000 at July 31, 2020, primarily due to an increase in land development activity in
New Mexico.
Financing Activities
Notes payable, net increased from $3,890,000
at April 30, 2020 to $5,496,000 at July 31, 2020, primarily due to additional borrowings to fund land development activities, partially
offset by repayments made on outstanding borrowings.
Refer to Notes 8 and 17 to the consolidated
financial statements contained in the 2020 Form 10-K for additional detail about each of the following outstanding financing facilities:
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Lomas Encantadas Subdivision. In
June 2019, BOKF, NA dba Bank of Albuquerque (“BOKF”) provided a non-revolving line of credit to Lomas Encantadas Development
Company LLC (“LEDC”), a subsidiary of the Company. The initial available principal amount of the loan was $2,475,000.
The outstanding principal amount of the loan was $1,005,000 and $1,576,000 as of July 31, 2020 and April 30, 2020. LEDC made
principal repayments of $637,000 during the three months ended July 31, 2020 and $675,000 during the year ended April 30, 2020.
The interest rate on the loan at July 31, 2020 was 3.2%. The Company capitalized interest and fees related to this loan of $12,000
and $29,000 during the three months ended July 31, 2020 and July 31, 2019. The total book value of the property mortgaged pursuant
to this loan was $3,044,000 as of July 31, 2020. At July 31, 2020, LEDC was in compliance with the financial covenants contained
within the loan documentation.
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Hawk Site Subdivision. In February
2020, Sandia Laboratory Federal Credit Union (“SLFCU”) provided a revolving line of credit to Mountain Hawk East Development
Company LLC (“MHEDC”), a subsidiary of the Company. The initial available principal amount of the loan was $3,000,000,
subject to certain limitations. The outstanding principal amount of the loan was $41,000 as of July 31, 2020. MHEDC made no principal
repayments during the three months ended July 31, 2020 or during the year ended April 30, 2020. The interest rate on the loan at
July 31, 2020 was 4.5%. The Company capitalized interest and fees related to this loan of less than $1,000 during the three months
ended July 31, 2020. The total book value of the property mortgaged pursuant to this loan was $1,760,000 as of July 31, 2020. At
July 31, 2020, MHEDC was in compliance with the financial covenants contained within the loan documentation.
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Las Fuentes at Panorama Village Subdivision.
In January 2020, BOKF provided a non-revolving line of credit to Las Fuentes Village II, LLC (“LFV”), a subsidiary
of the Company. The initial available principal amount of the loan was $2,750,000. The outstanding principal amount of the loan
was $2,312,000 as of July 31, 2020. LFV made no principal repayments during the three months ended July 31, 2020 or during the
year ended April 30, 2020. The interest rate on the loan at July 31, 2020 was 3.08%. The Company capitalized interest and fees
related to this loan of $16,000 during the three months ended July 31, 2020. The total book value of the property mortgaged pursuant
to this loan was $2,870,000 as of July 31, 2020. At July 31, 2020, LFV was in compliance with the financial covenants contained
within the loan documentation.
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Acquisition Financing: The acquisition of the Meso AM subdivision in Bernalillo County,
New Mexico in June 2020 by Lavender Fields, LLC (“LF”), a subsidiary of the Company, included $1,838,000 of deferred
purchase price, of which $919,000 is payable without interest on or before June 2021 and $919,000 is payable without interest on
or before June 2022. The total book value of the property mortgaged to secure payment of a note reflecting the deferred purchase
price was $3,530,000 as of July 31, 2020. At July 31, 2020, LF was in compliance with the financial covenants contained within
the loan documentation.
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Development Financing. In June 2020, BOKF provided a non-revolving line of credit to LF.
The initial available principal amount of the loan was $3,750,000. The outstanding principal amount of the loan was $27,000 as
of July 31, 2020. LF made no principal repayments during the three months ended July 31, 2020. The interest rate on the loan at
July 31, 2020 was 3.75%. The Company capitalized interest and fees related to this loan of less than $1,000 during the three months
ended July 31, 2020. The total book value of the property mortgaged pursuant to this loan was $3,530,000 as of July 31, 2020. At
July 31, 2020, LF was in compliance with the financial covenants contained within the loan documentation.
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SBA Paycheck Protection Program.
In April 2020, BOKF provided a loan to the Company pursuant to the Paycheck Protection Program administered by the U.S. Small Business
Administration. The amount of the loan was $298,000. The outstanding principal amount of the loan was $298,000 as of July 31, 2020.
The Company made no principal repayments during the three months ended July 31, 2020 or during the year ended April 30, 2020. The
interest rate on the loan at July 31, 2020 was 1.0%. The Company did not capitalize any interest or fees related to this loan during
the three months ended July 31, 2020. At July 31, 2020, the Company was in compliance with the financial covenants contained within
the loan documentation. The loan provides that all or a portion of the principal balance may be forgiven if certain conditions
are met.
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In August 2020, the Company repurchased
11,847 shares of common stock of the Company at a price of $4.48 per share in a privately negotiated transaction. As of the date
of the repurchase, the repurchased shares were retired and returned to the status of authorized but unissued shares of common stock.
Investing Activities
Capital expenditures were $3,000 for
the first quarter of 2021 and $1,000 for the first quarter of 2020, primarily
for office furniture and computer equipment.
Statement of Forward-Looking Information
The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. The Company and
its representatives may from time to time make written or oral statements that are “forward-looking”, including
statements contained in this report and other filings with the Securities and Exchange Commission, reports to the
Company’s shareholders and news releases. All statements that express expectations, estimates, forecasts or projections
are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, other
written or oral statements, which constitute forward-looking statements, may be made by or on behalf of the Company. Words
such as “expects”, “anticipates”, “intends”, “plans”, “believes”,
“seeks”, “estimates”, “projects”, “forecasts”, “may”,
“should”, variations of such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and
contingencies that are difficult to predict. All forward-looking statements speak only as of the date of this report or, in
the case of any document incorporated by reference, the date of that document. All subsequent written and oral
forward-looking statements attributable to the Company or any person acting on behalf of the Company are qualified by the
cautionary statements in this section. Many of the factors that will determine the Company’s future results are beyond
the ability of management to control or predict. Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in or suggested by such forward-looking statements.
The forward-looking statements contained
in this report include, but are not limited to, statements regarding (1) the Company’s expected liquidity sources, (2) the
availability of bank financing for projects, (3) the utilization of existing bank financing, (4) the timing of development of land
held as investment assets, (5) the effect of recent accounting pronouncements, (6) the timing of recognizing unrecognized compensation
expense related to shares of common stock issued under the AMREP Corporation 2016 Equity Compensation Plan, (7) the future issuance
of deferred stock units to directors of the Company, (8) the future business conditions that may be experienced by the Company
and (9) the forgiveness of any amounts due under the loan issued pursuant to the Paycheck Protection Program. The
Company undertakes no obligation to update or publicly release any revisions to any forward-looking statement to reflect events,
circumstances or changes in expectations after the date of such forward-looking statement, or to make any other forward-looking
statements, whether as a result of new information, future events or otherwise.