J.W. Mays, Inc. — Form 10-Q Summary
Business context and reporting period
J.W. Mays, Inc. is a real estate company generating rental income from approximately 50 tenants. This filing covers the three months ended October 31, 2017, the first quarter of fiscal 2018. The interim financial statements are unaudited; the July 31, 2017 balance sheet is audited.
Key financial metrics
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Total revenue | $4.785 million | $4.783 million |
| Income from operations | $685,044 | $751,742 |
| Net income | $395,395 | $462,025 |
| Income per share | $0.20 | $0.23 |
| Operating margin | 14.3% | 15.7% |
| Net margin | 8.3% | 9.6% |
| Operating cash flow | $1.369 million | $1.355 million |
| Capital expenditures | $1.025 million | $516,320 |
| Cash and cash equivalents | $5.708 million | $6.016 million |
At October 31, 2017, total assets were $65.117 million and shareholders’ equity was $50.464 million. Marketable securities were $2.935 million, and restricted cash totaled approximately $1.299 million. Mortgage debt was $5.590 million, consisting of $164,044 due within one year and $5.425 million thereafter before deferred financing costs. The mortgage bears fixed interest at 3.54% and matures in February 2020. Management stated that working capital and borrowing capabilities were adequate for planned operating and capital requirements.
Material changes versus the prior comparable period
- Revenue was essentially unchanged, increasing by $2,119, or less than 0.1%. Higher rental income from existing tenants offset the absence of $291,667 of prior-year revenue related to temporarily vacating a lease and the absence of a $10,952 real estate tax recovery.
- Real estate operating expenses increased by $9,940, while administrative and general expenses increased by $39,363. Depreciation increased by $19,514, primarily due to building improvements.
- Net income declined 14.4%, and income per share declined from $0.23 to $0.20. Interest expense exceeded investment income by $79,649 versus $58,717 in the prior-year quarter, partly due to litigation-related interest.
- Comprehensive income increased to $464,003 from $418,035 because of a $68,608 after-tax unrealized gain on available-for-sale securities, compared with a $43,990 loss in the prior-year quarter.
- Operating cash flow increased modestly, but capital expenditures nearly doubled, reducing the quarterly increase in cash to $326,490 from $787,235.
Guidance, outlook, risks and unusual items
The filing provides no quantitative earnings or revenue guidance. Management expects liquidity to cover planned operating and capital requirements. Several recently signed or extended leases are expected to begin or resume occupancy and rent payments in spring 2018 or January 2018, including a 7,700-square-foot medical facility lease and other Nine Bond Street leases. A Jamaica, New York tenant vacated 2,000 square feet, resulting in an expected annual rent loss of $58,000.
Planned and ongoing capital projects include tenant renovations, elevator upgrades and other building improvements. The Jamaica elevator project is expected to cost approximately $800,000 and be completed in June 2018. The company also expects approximately $400,000 of renovation costs for a new tenant.
The company paid $189,248 in October 2017 pursuant to a court judgment related to a contractor dispute. It continues to pursue recovery of a $376,467 contractor deposit, while contractor and subcontractor claims could result in additional damages of up to approximately $700,000; the ultimate outcome remains uncertain. Other lawsuits and claims are not expected by management to have a material adverse effect.
Rental income is concentrated among three tenants, which contributed 17.78%, 14.61% and 12.99% of quarterly rental income. Key risks include tenant concentration and lease cancellations, economic and regulatory changes, access to credit, loan covenant compliance, construction costs, litigation outcomes, labor conditions and changes in accounting estimates. The company has fixed-rate debt and does not use derivatives, limiting exposure to interest-rate changes.
The company expects adoption of the new revenue recognition standard and financial-instrument guidance to have no significant impact. The new leases standard is expected to increase assets and liabilities when adopted, with no material income-statement impact currently expected.
Important facts for investors to verify
- Whether new and extended leases commence occupancy and rent payments as projected during 2018.
- The final outcome and potential additional exposure from the Fishkill contractor litigation.
- The timing and total cost of elevator, tenant-improvement and other capital projects.
- The financial condition and renewal prospects of the three largest tenants.
- The company’s ability to fund capital expenditures while maintaining liquidity and servicing the mortgage due in 2020.
- The impact of future adoption of the leases and restricted-cash accounting standards.
- The filing’s statement that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.