J.W. Mays, Inc. Form 10-Q Summary
Business context and reporting period
J.W. Mays, Inc. operates as a real estate enterprise following the discontinuation of its retail department store segment in 1989. This filing covers the fiscal first quarter ended October 31, 2012, compared with the quarter ended October 31, 2011. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Rental revenue | $4.195 million | $3.983 million | +5.3% |
| Income from operations | $948,312 | $641,054 | +47.9% |
| Net income | $500,774 | $372,177 | +34.5% |
| Earnings per share | $0.25 | $0.18 | +38.9% |
| Operating margin | 22.6% | 16.1% | +6.5 percentage points |
| Net margin | 11.9% | 9.3% | +2.6 percentage points |
| Cash flow from operations | $1.428 million | $1.951 million | -26.8% |
| Capital expenditures | $228,153 | $437,587 | -47.9% |
Real estate operating expenses declined to $2.001 million from $2.014 million, while administrative and general expenses declined to $844,069 from $940,421. Depreciation and amortization increased to $401,257 from $386,797. Interest expense net of investment income was $103,538, compared with $148,877 in the prior-year quarter.
Cash and cash equivalents were $2.348 million at October 31, 2012, compared with $1.340 million at July 31, 2012. Total current assets were $4.262 million and current liabilities were $2.004 million, implying working capital of approximately $2.258 million. Total liabilities were $12.599 million and shareholders’ equity was $43.225 million.
Mortgage debt was $5.712 million, including the current portion, and the company had a $1.000 million unsecured related-party note payable due December 15, 2013. Management reported total fixed-rate debt of $6.712 million. The mortgages bear interest at 6.98%; the related-party note bears interest at 5.00%.
Material changes versus the prior comparable period
- Revenue increased primarily from two new tenants at the Nine Bond Street property, one new Massapequa tenant, and higher rents from existing tenants.
- Operating income and margins improved because of higher revenue and lower real estate operating and administrative expenses.
- Operating cash flow decreased despite higher net income, primarily reflecting changes in taxes, receivables, accrued liabilities and other operating balances; the prior-year period included a $315,577 income-tax refund.
- Financing cash outflows fell substantially to $32,689 from $2.198 million, reflecting much lower mortgage and other debt payments.
- Total marketable securities increased to approximately $2.568 million from $2.393 million at July 31, 2012. Comprehensive income was $514,170, including a $13,396 unrealized gain on available-for-sale securities.
Guidance, outlook, risks and unusual items
The filing provides no quantitative earnings or revenue guidance. Management stated that current working capital and borrowing capabilities were adequate for planned operating and capital requirements, but noted that quarterly results are not necessarily indicative of the full fiscal year.
Two significant tenants at the Jowein building notified the company that they would vacate in January 2013. Management estimated annual rental income losses of approximately $1.357 million and $546,000, respectively, and was seeking replacement tenants. The potential combined annual loss is approximately $1.903 million before any re-leasing.
The company spent $66,898 on elevator work during the quarter; the project is expected to cost approximately $300,000 and be completed in spring 2013. One tenant provided an irrevocable $230,000 letter of credit as a security deposit.
One tenant represented 22.43% of rental income and another represented 15.50% during the quarter. Pending lawsuits and claims were considered by management unlikely to have a material adverse effect. If the company sells, transfers, disposes of or demolishes 25 Elm Place, it may be required to create a condominium unit for a loading dock; the cost and obligation cannot currently be determined.
Principal disclosed risks include tenant cancellations, economic and competitive conditions, access to credit, regulatory changes, litigation, loan-covenant compliance, customer creditworthiness and estimation uncertainty. The company uses fixed-rate debt and does not use derivatives, limiting exposure to interest-rate changes. Management reported effective disclosure controls and no material weaknesses.
Important facts for investors to verify
- Re-leasing progress and expected financial impact of the two Jowein building vacancies beginning in January 2013.
- Occupancy, lease expirations and tenant concentration, particularly the two tenants representing 37.93% of quarterly rental income.
- Ability to fund the planned elevator project and other capital requirements while servicing mortgage debt and the related-party note.
- Terms, maturity and covenant compliance for the 6.98% mortgages due February 2015 and the $1.000 million related-party note due December 2013.
- Status and potential cost of the 25 Elm Place condominium-unit contingency and other litigation or claims.
- Whether improved quarterly profitability and lower capital spending are sustainable, given the expected rental-income losses and reduced operating cash flow.