J.W. Mays, Inc. Form 10-Q Summary
Business Context and Reporting Period
J.W. Mays, Inc. is a real estate company deriving substantially all revenue from rental properties. This unaudited Form 10-Q covers the three and six months ended January 31, 2018, the second quarter of fiscal 2018, compared with the corresponding periods of fiscal 2017. The company had 2,015,780 shares outstanding as of March 8, 2018.
Financial Performance and Position
| Metric | Three Months Ended January 31, 2018 | Six Months Ended January 31, 2018 |
|---|---|---|
| Total revenue | $4.79 million | $9.58 million |
| Income from operations | $80,243 | $765,287 |
| Net income | $2.45 million | $2.85 million |
| Income per share | $1.21 | $1.41 |
| Cash flow from operations | Not separately provided | $1.16 million |
- Rental income was $4.79 million for the quarter and $9.58 million for the six-month period.
- Approximate operating margins were 1.7% for the quarter and 8.0% for the six months. Net margins were approximately 51.2% and 29.8%, respectively, substantially reflecting a noncash tax benefit.
- The company recorded income tax benefits of $2.37 million for the quarter and $2.16 million for the six months, primarily from remeasuring deferred tax assets and liabilities under the Tax Cuts and Jobs Act.
- Cash and cash equivalents were $5.16 million at January 31, 2018, compared with $5.38 million at July 31, 2017. Total current assets were $7.29 million versus current liabilities of $2.33 million.
- Property and equipment, net, totaled $49.87 million. Total assets were $65.49 million and shareholders’ equity was $53.03 million.
- Mortgage debt totaled approximately $5.50 million, including $165,532 due within one year. The mortgage bears fixed interest at 3.54% and is scheduled to mature on February 1, 2020. Management reported fixed-rate debt of $5.55 million for market-risk purposes.
- Cash used in investing activities was $1.59 million, including $1.26 million of property and equipment additions. Financing activities provided $205,918, primarily from increased security deposits, partially offset by mortgage payments.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined 0.7% from $4.82 million to $4.79 million; six-month revenue declined 0.3% from $9.61 million to $9.58 million. The prior-year periods included revenue from temporarily vacating a lease of $291,667 for the quarter and $583,334 for six months.
- Quarterly operating income declined from $508,777 to $80,243, and six-month operating income declined from $1.27 million to $765,287, primarily because real estate operating expenses increased.
- Real estate operating expenses increased 12.6% for the quarter and 6.7% for the six months, mainly because of higher real estate taxes and maintenance costs.
- Net income increased substantially from $323,562 to $2.45 million for the quarter and from $785,587 to $2.85 million for the six months, primarily because of the approximately $2.4 million deferred tax benefit from the Tax Act.
- Investment income exceeded interest expense by $6,686 in the quarter, compared with interest expense exceeding investment income by $19,215 in the prior-year quarter. For six months, the net expense narrowed to $72,963 from $83,650.
- Cash flow from operations decreased to $1.16 million from $2.00 million, despite higher reported net income, because the Tax Act benefit was noncash and accrued liabilities declined.
- Marketable securities increased to $3.13 million from $2.82 million, and the unrealized after-tax gain recorded in shareholders’ equity increased to $545,831 from $368,476.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that working capital and borrowing capabilities are adequate for planned operating and capital requirements. No quantitative earnings guidance was provided.
- Several leasing initiatives are expected to support future occupancy, including a 10-year medical-facility lease, additional retail leases, and expanded or extended leases with existing tenants. Some new or renovated spaces are expected to begin occupancy and rent payments in late 2018.
- Planned and ongoing capital projects include elevator upgrades, tenant improvements, electrical work, and other construction. The filing identifies additional expected project costs, including approximately $800,000 for a Jamaica elevator project and approximately $400,000 for a medical-tenant project.
- The Tax Act benefit is an estimated, noncash item. The company expected to finalize related tax accounting by the end of fiscal 2018, and the final impact could differ materially from the estimate.
- The company is pursuing recovery of a $376,467 contractor deposit related to defective workmanship. Contractors and subcontractors have asserted claims of approximately $700,000. A $189,248 judgment, including interest, was paid in October 2017, while further court decisions remained pending.
- The company participates in a multi-employer pension plan reported as being in critical status. Withdrawal liability cannot currently be determined, and the company remains subject to required contributions and a surcharge under the rehabilitation plan.
- Rental income is concentrated among approximately 50 tenants: three tenants accounted for 17.77%, 14.62%, and 12.44% of six-month rental income.
- Key risks include economic conditions, tenant financial condition and lease cancellations, access to credit, regulatory changes, litigation outcomes, construction cost estimates, loan covenant compliance, and recoverability of claims.
- The company stated that its disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the final accounting for the Tax Act deferred-tax remeasurement and distinguish the noncash benefit from recurring operating profitability.
- Review tenant concentration, lease commencement dates, renewal options, and the expected timing of rent from newly leased or renovated space.
- Assess the remaining mortgage balance, February 2020 maturity, refinancing requirements, and compliance with applicable loan covenants.
- Monitor construction commitments, future capital expenditures, and the timing and cost of tenant improvements.
- Track the contractor litigation, potential exposure of up to approximately $700,000, and any recovery of the contractor deposit.
- Evaluate the company’s exposure to the critical-status multi-employer pension plan and any future withdrawal or funding liability.
- Reconcile operating cash generation with reported net income, given the significant deferred-tax benefit and ongoing capital spending.