Business Context and Reporting Period
J.W. Mays, Inc. is a real estate company deriving substantially all operating revenue from rental properties. This unaudited Form 10-Q covers the three and nine months ended April 30, 2016, compared with the corresponding 2015 periods. The fiscal year ends July 31, 2016. The company reported 2,015,780 common shares outstanding as of June 1, 2016.
Financial Performance and Position
| Metric | Three Months Ended Apr. 30, 2016 | Three Months Ended Apr. 30, 2015 | Nine Months Ended Apr. 30, 2016 | Nine Months Ended Apr. 30, 2015 |
|---|---|---|---|---|
| Total revenue | $4.675 million | $4.739 million | $13.852 million | $14.086 million |
| Income from operations | $0.720 million | $0.802 million | $1.783 million | $2.346 million |
| Net income | $0.451 million | $0.422 million | $1.075 million | $1.190 million |
| Income per share | $0.22 | $0.21 | $0.53 | $0.59 |
| Operating margin | 15.4% | 16.9% | 12.9% | 16.6% |
| Net margin | 9.7% | 8.9% | 7.8% | 8.4% |
- Rental income was $12.977 million for the nine-month period, and revenue from the agreement to temporarily vacate leased premises was $0.875 million.
- Cash provided by operating activities was $3.127 million, compared with $2.488 million in the prior-year period.
- Capital expenditures were $2.254 million, resulting in cash used in investing activities of $2.313 million.
- Cash increased to $4.820 million at April 30, 2016, from $4.086 million at July 31, 2015.
- Total assets were $66.448 million and shareholders’ equity was $47.450 million at April 30, 2016.
- Mortgage debt totaled approximately $5.825 million, including the current portion. A $1.000 million related-party note was classified as current and matures December 15, 2016. The company disclosed total fixed-rate debt of $6.825 million.
- The mortgage bears fixed interest at 3.54% and has a final due date of February 1, 2020.
- Management stated that current working capital and borrowing capabilities were adequate for planned operating and capital requirements.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 1.4%, while nine-month revenue declined 1.7%, primarily because a retail tenant stopped paying rent and vacated the Nine Bond Street property in December 2015. A new office tenant partially offset the decline.
- Third-quarter net income increased 7.0%, despite lower revenue, mainly because real estate operating expenses declined and interest expense was lower.
- Nine-month net income decreased 9.6%, reflecting lower revenue, higher real estate operating expenses, and higher administrative and general expenses.
- Administrative and general expenses increased partly because New York State and New York City capital-based franchise taxes of $117,150 in the quarter and $181,203 year to date were not incurred in the comparable periods.
- Nine-month real estate operating expenses rose to $7.489 million from $7.384 million, while depreciation and amortization fell to $1.223 million from $1.287 million, primarily because depreciation on the Fishkill building expired.
- Cash flow from operations improved by $0.639 million, while capital expenditures increased by $0.856 million from the prior-year period.
- The related-party note moved from long-term classification at July 31, 2015 to current classification at April 30, 2016.
- Construction in progress increased to $1.649 million from $0.639 million, primarily for improvements associated with a new office tenant at the Jowein building.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- The filing provides no formal earnings or revenue guidance. Management expects liquidity to be adequate for planned requirements.
- Rent for a 5,640-square-foot expansion by an existing Jowein building tenant began in February 2016. Rent for a 17,425-square-foot office lease is anticipated to begin in late 2016. Related brokerage commissions and construction costs are estimated at approximately $0.5 million and $2.0 million, respectively.
- The company is seeking replacement tenants for space vacated at its Jamaica and Nine Bond Street properties. The Jamaica vacancy is expected to reduce annual rental income by approximately $42,000.
- Several leases were extended, including significant leases at Nine Bond Street and 25 Elm Place through January 31, 2036, generally with additional renewal options.
- The company recognized deferred revenue from a $3.5 million payment related to temporarily vacating premises; $0.875 million remained recognized as revenue during the first nine months of fiscal 2016.
- The company is litigating against a contractor to recover a $376,467 roof-replacement deposit and seek damages. The outcome cannot currently be predicted.
- Other lawsuits and claims are pending, but management believes they will not have a material adverse effect. Potential liability associated with creating a condominium unit at 25 Elm Place cannot currently be determined.
- The United Food and Commercial Workers Local 888 Pension Fund is in critical status. The company’s potential withdrawal liability cannot be determined, although management has not decided to withdraw.
- Key risks include tenant defaults or lease cancellations, economic conditions, access to credit, competition, regulatory changes, loan covenant compliance, litigation outcomes, and estimation uncertainty.
- The company uses fixed-rate debt and does not use derivative instruments; management stated that its debt does not expose it to interest-rate market risk.
- Management reported that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Investor Verification Priorities
- Verify the collectibility and replacement status of the rent associated with the departed Nine Bond Street retail tenant.
- Review the December 2016 maturity and renewal or repayment terms of the $1.000 million related-party note.
- Assess the remaining funding requirements and expected completion of the approximately $2.0 million Jowein tenant-improvement project.
- Evaluate tenant concentration: two tenants accounted for 18.59% and 15.92% of nine-month rental income.
- Monitor the contractor litigation involving the $376,467 deposit and the unresolved 25 Elm Place condominium-unit contingency.
- Review the financial condition and potential withdrawal liability exposure related to the critical-status multi-employer pension plan.
- Confirm the sustainability of operating cash flow after recurring capital expenditures, tenant improvements, and debt service.