J. W. Mays, Inc. — Form 10-Q Summary
Business context and reporting period
J. W. Mays, Inc. is a real estate company that owns and leases commercial office and retail properties. This Form 10-Q covers the three months ended October 31, 2019, the first quarter of fiscal 2020. The financial statements are unaudited. The company reported 2,015,780 common shares outstanding as of December 5, 2019.
Financial performance and position
| Metric | Three months ended October 31, 2019 | Three months ended October 31, 2018 |
|---|---|---|
| Rental revenue | $5.04 million | $5.16 million |
| Income from operations | $184,276 | $(24,705) |
| Income before taxes | $202,544 | $(76,194) |
| Net income (loss) | $128,544 | $(79,194) |
| Earnings (loss) per share | $0.06 | $(0.04) |
| Cash provided by operating activities | $2.15 million | $1.77 million |
- Revenue declined approximately 2.4% year over year. Net income improved by $207,738, and net margin was approximately 2.6% versus a negative 1.5% in the prior-year quarter.
- Real estate operating expenses increased to $3.25 million from $2.98 million, while administrative and general expenses decreased to $1.22 million from $1.74 million. Depreciation decreased to $387,410 from $466,297.
- Investment income was $65,003, including a $46,981 gain on the sale of marketable securities. Interest expense was $27,449, producing net investment income over interest expense of $18,268.
- At October 31, 2019, cash and cash equivalents were $4.99 million and total cash, cash equivalents and restricted cash were $5.90 million. Marketable securities totaled $3.60 million.
- Total assets were $85.76 million, total liabilities were $31.03 million, and shareholders’ equity was $54.74 million.
- Net cash used in investing activities was $1.45 million, principally for $1.45 million of property and equipment additions. Financing activities used $62,296.
- Mortgage debt totaled approximately $5.25 million, consisting of $777,736 current debt and $4.47 million long-term debt at quarter-end. The debt was fixed-rate and secured by the Nine Bond Street building.
- Operating lease right-of-use assets of $26.53 million and operating lease liabilities of $17.56 million were recognized following adoption of ASC 842.
Material changes versus the prior comparable period
- The company moved from a $79,194 net loss to $128,544 net income. Management attributed the prior-year loss primarily to a $635,000 litigation settlement related to the Fishkill building; the settlement was paid in November 2018.
- Rental revenue decreased primarily because of lost rental income from two tenants, partially offset by a new tenant.
- Real estate operating expenses rose primarily because of higher real estate taxes and rent expense.
- Administrative expenses benefited from the absence of the prior-year litigation settlement, partly offset by higher legal and professional costs and $40,292 of bad debt expense related to an early lease termination.
- The company adopted ASC 842 effective August 1, 2019, recording approximately $27.1 million of operating lease right-of-use assets and $17.9 million of operating lease liabilities without an opening retained-earnings adjustment.
- In November 2019, the company refinanced its mortgage with a $5.40 million loan at 4.375%, self-liquidating over five years.
Guidance, outlook, risks and unusual items
- Management stated that working capital and borrowing capabilities were adequate for planned operating and capital requirements; no formal earnings guidance was provided.
- Several tenant changes are expected to affect future rental income: annual rent losses of approximately $814,000 from a Jowein tenant vacancy, $965,000 from a partial surrender at Nine Bond Street, and approximately $250,000 from a Fishkill tenant termination, partly offset by new or renewed leases.
- A community college lease at the Fishkill property is expected to commence in June 2020. Renovation costs are estimated at approximately $3.2 million and brokerage commissions at $448,939; the company was discussing financing with a bank.
- Additional planned or ongoing capital projects include approximately $1.8 million for elevators, $1.5 million for a lobby, and other building improvements.
- Rental income is concentrated: three tenants represented approximately 16.0%, 15.8% and 12.3% of quarterly rental revenue.
- The company participates in a multi-employer pension plan classified as critical and declining. Any potential withdrawal liability cannot be determined, although management had not decided to withdraw.
- Other lawsuits and claims were pending, but management believed they would not materially affect the financial statements. A potential obligation related to creating a condominium unit at 25 Elm Place cannot currently be quantified.
- Key risks include tenant cancellations, customer financial condition, access to credit, loan covenant compliance, litigation, competition, regulatory changes, cost estimates and broader economic conditions.
Important facts for investors to verify
- Reconcile the reported first-quarter period ending October 31, 2019 with the requested “2020 Q1” designation.
- Assess the effect of tenant vacancies, partial surrenders and lease commencements on forward rental revenue and occupancy.
- Verify financing and liquidity for the approximately $3.2 million Fishkill renovation and other capital commitments.
- Review the November 2019 mortgage refinancing, including the higher 4.375% rate, repayment schedule and collateral.
- Evaluate tenant concentration, collectability and the $40,292 bad debt expense following the early lease termination.
- Review the ASC 842 lease liabilities, related-party ground lease, and the obligation to transfer the ground-lease building and improvements to the affiliate landlord upon lease termination in 2029.
- Monitor the critical-and-declining multi-employer pension plan and any potential withdrawal liability.