AXR AMREP Corp

Notes to Consolidated Financial Statements (Unaudited)

Three and Six Months Ended October 31, 2020 and 2019

(1)          SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES

The accompanying unaudited consolidated financial statements have been prepared by AMREP Corporation (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information, and do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The Company, through its subsidiaries, is primarily engaged in two business segments: land development and homebuilding. The Company has no foreign sales. All significant intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of management, these unaudited consolidated financial statements include all adjustments, which are of a normal recurring nature, considered necessary to reflect a fair presentation of the results for the interim periods presented. The results of operations for such interim periods are not necessarily indicative of what may occur in future periods. Unless the context otherwise indicates, all references to 2021 and 2020 are to the fiscal years ending April 30, 2021 and 2020 and all references to the second quarter and first six months of 2021 and 2020 mean the fiscal three month and six month periods ended October 31, 2020 and 2019.

The unaudited consolidated financial statements herein should be read in conjunction with the Company’s annual report on Form 10-K for the year ended April 30, 2020, which was filed with the SEC on July 27, 2020 (the “2020 Form 10-K”). Certain 2020 balances in these financial statements have been reclassified to conform to the current year presentation with no effect on net loss or shareholders’ equity.

Summary of Significant Accounting Policies

The significant accounting policies used in preparing these consolidated financial statements are consistent with the accounting policies described in the 2020 Form 10-K, except for those adopted as described below.

Revenue Recognition

Recently Adopted Accounting Pronouncements

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 on May 1, 2020. The adoption of ASU 2018-13 by the Company did not have a material effect on its consolidated financial statements.

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 on May 1, 2020. The adoption of ASU 2018-14 by the Company did not have a material effect on its consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes, which removes certain exceptions for companies related to tax allocations and simplifies when companies recognize deferred tax liabilities in an interim period. ASU 2019-12 will be effective for the Company’s fiscal year beginning May 1, 2021. The Company is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.

There was no restricted cash at October 31, 2020 and April 30, 2020.

Land held for development represents property located in areas that are planned to be developed in the near term. As of October 31, 2020 and April 30, 2020, the Company held approximately 6,000 acres of land in New Mexico classified as land held for development. Construction in process relates to construction costs for residential homes being built and offered for sale by the homebuilding business segment.

Land held for long-term investment represents property located in areas that are not planned to be developed in the near term and thus has not been offered for sale. As of October 31, 2020 and April 30, 2020, the Company held approximately 12,000 acres of land in New Mexico classified as land held for long-term investment.

Buildings are comprised of 204,000 square feet of warehouse and office buildings in Palm Coast, Florida and a 14,000 square foot retail building in the Las Fuentes at Panorama Village subdivision in Rio Rancho, New Mexico. Depreciation associated with the buildings was $262,000 and $279,000 for the six months ended October 31, 2020 and October 31, 2019 and $140,000 and $157,000 for the three months ended October 31, 2020 and October 31, 2019. Construction in process relates to the construction costs of such retail building, which was completed during the three months ended October 31, 2020.

Prepaid expenses as of October 31, 2020 primarily consist of prepaid insurance, stock compensation, prepayments for office rent, in-process prepayments of amounts due under the public improvement district and security deposits for the buildings in Palm Coast, Florida. Prepaid expenses as of October 31, 2019 primarily consist of prepaid insurance and stock compensation.

Depreciation expense associated with property and equipment was $8,000 and $9,000 for the six months ended October 31, 2020 and October 31, 2019 and $2,000 and $5,000 for the three months ended October 31, 2020 and October 31, 2019.

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 that were entered into prior to May 1, 2020.

LEDC and ASW made certain representations and warranties in connection with this loan and are required to comply with various covenants, reporting requirements and other customary requirements for similar loans. The loan documentation contains customary events of default for similar financing transactions, including LEDC’s failure to make principal, interest or other payments when due; the failure of LEDC or ASW to observe or perform their respective covenants under the loan documentation; the representations and warranties of LEDC or ASW being false; the insolvency or bankruptcy of LEDC or ASW; and the failure of ASW to maintain a net worth of at least $32 million. Upon the occurrence and during the continuance of an event of default, BOKF may declare the outstanding principal amount and all other obligations under the loan immediately due and payable. LEDC incurred customary costs and expenses and paid certain fees to BOKF in connection with the loan. At October 31, 2020, LEDC was in compliance with the financial covenants contained in the loan documentation. The total book value of the property mortgaged pursuant to this loan was $289,000 as of October 31, 2020. The Company’s capitalized interest and fees related to this loan were immaterial during the three and six months ended October 31, 2020.

Refer to Note 8 to the consolidated financial statements contained in the 2020 Form 10-K for additional detail about each of the following expired or terminated financing facilities:

The following table summarizes the scheduled principal repayments subsequent to October 31, 2020:

(8)       REVENUES

Land sale revenues. Substantially all of the land sale revenues were received from four customers during each of the three and six months ended October 31, 2020 and from three customers during each of the three and six months ended October 31, 2019.

Home sale revenues. Home sale revenues are from homes constructed and sold by the Company in the Albuquerque metropolitan area. All home sale revenues were received from one customer during the three months ended October 31, 2020.

Rental revenues. Rental revenues consist of rent received from tenants at the Company’s warehouse and office buildings in Palm Coast, Florida and at a retail building in the Las Fuentes at Panorama Village subdivision in Rio Rancho, New Mexico.

Other revenues. Other revenues consist of:

Refer to Note 9 to the consolidated financial statements contained in the 2020 Form 10-K for additional detail about each category of other revenues.

The Company owns certain minerals and mineral rights in and under approximately 55,000 surface acres of land in Sandoval County, New Mexico. The lease to a third party with respect to such mineral rights expired in September 2020 and no drilling had commenced with respect to such mineral rights. The Company did not record any revenue in 2021 related to this lease.

Miscellaneous other revenue for the three and six months ended October 31, 2020 primarily consist of payments for impact fee credits and a land condemnation. Miscellaneous other revenue for the three and six months ended October 31, 2019 primarily consist of forfeited deposits and non-refundable option payments.

Corporate general and administrative expenses included a non-cash pre-tax pension settlement charge of $2,929,000 in the three and six months ended October 31, 2019, due to the Company’s defined benefit pension plan paying an aggregate of $7,280,000 in lump sum payouts of pension benefits to former employees. No such settlement expense was incurred in the same periods of 2020.

Pension Plan

Refer to Note 11 to the consolidated financial statements contained in the 2020 Form 10-K for detail regarding the Company’s defined benefit pension plan. The Company recognizes the known changes in the funded status of the pension plan in the period in which the changes occur through other comprehensive income, net of the related deferred income tax effect. The Company recognized other comprehensive income of $180,000 and $252,000 for the six months ended October 31, 2020 and October 31, 2019 and $90,000 and $98,000 for the three months ended October 31, 2020 and October 31, 2019 related to a decrease in the Company’s pension liability, net of tax. The Company funds the pension plan in compliance with IRS funding requirements. The Company made voluntary contributions to the pension plan of $1,847,000 during the three and six months ended October 31, 2020 and $3,600,000 during the three and six months ended October 31, 2019.

Equity Compensation Plan

Refer to Note 11 to the consolidated financial statements contained in the 2020 Form 10-K for detail regarding the AMREP Corporation 2016 Equity Compensation Plan (the “Equity Plan”). The Company issued 9,000 shares of restricted common stock under the Equity Plan during each of the six months ended October 31, 2020 and October 31, 2019. During the six months ended October 31, 2020 and October 31, 2019, 12,834 shares and 14,833 shares of restricted common stock previously issued under the Equity Plan vested. As of October 31, 2020 and October 31, 2019, 29,000 shares and 36,834 shares of restricted common stock previously issued under the Equity Plan had not vested. The Company recognized non-cash compensation expense related to the vesting of restricted shares of common stock net of forfeitures of $7,000 and $54,000 for the six months ended October 31, 2020 and October 31, 2019 and $25,000 and $30,000 for the three months ended October 31, 2020 and October 31, 2019. As of October 31, 2020 and October 31, 2019, there was $73,000 and $135,000 of unrecognized compensation expense related to restricted shares of common stock previously issued under the Equity Plan which had not vested as of those dates, which is expected to be recognized over the remaining vesting term not to exceed three years.

In connection with the resignation of a director, the Company (i) issued 12,411 shares of common stock during the three months ended October 31, 2020 pursuant to an equivalent number of deferred common share units previously issued to such director and (ii) paid $20,000 to such director in lieu of issuance of deferred common share units earned for calendar year 2020. The Company recognized non-cash expense related to deferred common share units expected to be issued to non-employee members of the Company’s Board of Directors of $35,000 and $53,000 for the six months ended October 31, 2020 and October 31, 2019 and $21,000 and $23,000 for the three months ended October 31, 2020 and October 31, 2019.

Refer to Note 2 to the consolidated financial statements contained in the 2020 Form 10-K for detail regarding the deferred purchase price with respect to a former business segment of the Company.

Other income for the three and six months ended October 31, 2020 consist 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 former business segment of the Company. During the six months ended October 31, 2020, affiliates of the Company and affiliates of this former business segment entered into a settlement agreement pursuant to which, among other things, the Company received $650,000 as a settlement payment and $350,000 for rent with respect to properties in Palm Coast, Florida for the period May 2020 through August 2020.

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.

In September 2020, the Board of Directors of the Company authorized the Company to purchase up to 1,000,000 shares of common stock of the Company from time to time pursuant to a share repurchase program, subject to the total expenditure for the purchase of shares under the share repurchase program not exceeding $5,000,000, exclusive of any fees, commissions and other expenses related to such repurchases. Under the share repurchase program, the Company may have repurchased its common stock from time to time, in amounts, at prices, and at such times as the Company deems appropriate, subject to market conditions, legal requirements and other considerations. The Company’s repurchases may have been executed using open market purchases, unsolicited or solicited privately negotiated transactions or other transactions, and may have been effected pursuant to trading plans intended to qualify under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The share repurchase program did not obligate the Company to repurchase any specific number of shares and may have been suspended, modified or terminated at any time without prior notice. The share repurchase program did not contain a time limitation during which repurchases are permitted to occur. In October 2020, the Company repurchased 675,616 shares of common stock of the Company at a price of $6.18 per share in a privately negotiated transaction pursuant to the share repurchase program. 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.

Prior to 2020, the Company operated in primarily one business segment: the real estate business.

In November 2020, the Company repurchased 143,482 shares of common stock of the Company at a price of $6.18 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. The share repurchase was not completed pursuant to the Company’s share repurchase program.

In November 2020, the Company’s share repurchase program was terminated.