J.W. Mays, Inc. Form 10-Q Summary
Business context and reporting period
J.W. Mays, Inc. is a real estate company generating primarily rental income from commercial properties. This Form 10-Q covers the three and nine months ended April 30, 2017, within the fiscal year ending July 31, 2017. The interim financial statements are unaudited. The company had 2,015,780 common shares outstanding as of June 8, 2017.
Key financial metrics
| Metric | Three months ended April 30, 2017 | Three months ended April 30, 2016 | Nine months ended April 30, 2017 | Nine months ended April 30, 2016 |
|---|---|---|---|---|
| Total revenues | $4.95 million | $4.68 million | $14.56 million | $13.85 million |
| Income from operations | $924,125 | $726,154 | $2.19 million | $1.80 million |
| Operating margin | 18.7% | 15.5% | 15.0% | 13.0% |
| Net income | $606,234 | $451,391 | $1.39 million | $1.08 million |
| Net margin | 12.2% | 9.7% | 9.6% | 7.8% |
| Earnings per share | $0.30 | $0.22 | $0.69 | $0.53 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $3.45 million | $3.13 million |
Rental income was $4.66 million for the quarter and $13.67 million for the nine-month period. Revenue to temporarily vacate leased premises contributed $291,667 for the quarter and $875,001 for the nine months in both comparable periods.
At April 30, 2017, total assets were $64.03 million, including $49.45 million of net property and equipment, $5.37 million of cash and cash equivalents, and $2.72 million of marketable securities. Total liabilities were $14.62 million and shareholders’ equity was $49.41 million.
Debt consisted primarily of a fixed-rate mortgage secured by the Bond Street building. Mortgage debt was $5.61 million before deferred financing costs, including $161,123 due within one year. The related-party note payable of $1.0 million was paid in full on December 15, 2016. The company reported fixed-rate debt of $5.67 million at April 30, 2017 and no derivative instruments.
Nine-month investing cash outflows were $2.33 million, including $1.64 million of capital expenditures. Financing cash outflows were $982,115, primarily reflecting debt payments. Cash increased by $140,253 during the nine months to $5.37 million.
Material changes versus the prior comparable period
- Three-month revenue increased 5.9% and nine-month revenue increased 5.1%, primarily from higher rental income from existing tenants.
- Three-month net income increased 34.3%; nine-month net income increased 29.4%. Earnings per share increased from $0.22 to $0.30 for the quarter and from $0.53 to $0.69 for the nine months.
- Operating expenses increased, but revenue growth exceeded the increase in real estate operating, administrative, and depreciation expenses, improving operating margins.
- Investment income increased to $80,470 for the nine months from $16,795, helped by gains on marketable securities compared with a loss in the prior period.
- Cash from operations increased by $323,162, while capital expenditures decreased by $618,538 from the prior nine-month period.
- Financing outflows increased substantially because the company repaid the $1.0 million related-party note.
- Marketable securities increased to $2.72 million from $2.06 million at July 31, 2016, and the unrealized gain recorded in equity increased to $316,485 from $264,541.
Guidance, outlook, risks, contingencies, and unusual items
Management stated that current working capital and borrowing capabilities are adequate to meet planned operating and capital requirements. The filing does not provide quantitative earnings or revenue guidance.
- A Nine Bond Street tenant filed for Chapter 11 protection on April 4, 2017. The tenant represented 2.45% of annual net rental income for the year ended July 31, 2016. If the lease is rejected and the space vacated, management estimates cash flow could be adversely affected by approximately $37,000 per month.
- A large Fishkill tenant that had planned to vacate agreed in May 2017 to remain on a month-to-month basis. Another tenant surrendered 5,000 square feet in May 2017, which was leased to a new tenant for ten years.
- The company expects additional tenant-related renovation and construction spending, including approximately $635,000 for elevator work and approximately $420,000 for renovations for a medical tenant. The filing states that some related brokerage commissions and construction costs remain relevant to planned leasing activity.
- The company is pursuing recovery of a $376,467 contractor deposit related to defective roof work. Management indicated a reasonable possibility that the deposit will not be recovered in full; an additional $141,132 charge was recorded in October 2016.
- The company participates in a multi-employer pension plan classified as critical and declining. Any withdrawal liability cannot currently be determined, and the company has not decided to withdraw.
- Various lawsuits and claims are pending, but management believes their resolution will not materially affect the financial statements. The potential cost of creating a condominium unit for a loading dock at 25 Elm Place also cannot currently be determined.
- Key forward-looking risks include lease cancellations, tenant financial condition, economic conditions, access to credit, competition, regulatory changes, litigation outcomes, loan covenant compliance, labor availability, and changes in accounting estimates.
- Management reported that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Important facts for investors to verify
- Confirm the status and ultimate rental impact of the Chapter 11 tenant and the month-to-month Fishkill arrangement.
- Review tenant concentration: three tenants accounted for approximately 18.3%, 14.9%, and 10.7% of nine-month rental income.
- Assess recurring rental income separately from the $875,001 temporary-vacate revenue recognized during the nine months.
- Verify planned capital expenditures, leasing commissions, renovation obligations, and the company’s liquidity after these commitments.
- Review the fixed-rate mortgage maturity in February 2020, debt amortization, and compliance with applicable loan covenants.
- Evaluate exposure to the critical and declining multi-employer pension plan and the unresolved contractor deposit claim.
- Consider the effect of unrealized marketable-securities gains and other investment income on reported earnings.