J.W. Mays, Inc. — Form 10-Q Summary
Business Context and Reporting Period
J.W. Mays, Inc. operates as a real estate enterprise, generating substantially all continuing-operating revenue from rental properties. The filing covers the three and nine months ended April 30, 2012, compared with the corresponding 2011 periods. The financial statements are unaudited, except for the July 31, 2011 balance sheet.
Financial Performance and Position
- Revenue: Third-quarter revenue was $4.18 million, up 10.2% from $3.79 million. Nine-month revenue was $12.27 million, up 10.5% from $11.11 million. Growth primarily reflected higher rents from existing tenants and a new office tenant at Nine Bond Street.
- Operating income: Income before investment income, interest expense and taxes was $964,523 for the quarter and $2.27 million for the nine months, compared with $572,554 and $1.28 million, respectively, in 2011.
- Net income: Third-quarter net income was $140,159, or $0.07 per share, compared with $203,216, or $0.11 per share. Nine-month net income was $826,081, or $0.41 per share, compared with $195,197, or $0.10 per share.
- Margins: Operating margin was approximately 23.1% for the quarter and 18.5% for the nine months, versus approximately 15.1% and 11.5% in the prior periods. Net margin was approximately 3.4% for the quarter and 6.7% for the nine months, versus approximately 5.4% and 1.8%.
- Cash flow: Nine-month operating cash flow was $3.10 million, compared with $2.63 million. Investing activities used $1.51 million, including $1.08 million of capital expenditures. Financing activities used $3.34 million, primarily for mortgage and other debt payments.
- Liquidity: Cash and cash equivalents were $904,040 at April 30, 2012, down from $2.66 million at July 31, 2011. Current assets were $3.25 million and current liabilities were $2.29 million, implying a current ratio of approximately 1.4x.
- Debt: Mortgages payable totaled $5.79 million, including $155,896 due within one year. Total liabilities were $12.86 million and shareholders’ equity was $42.28 million. The company also had a $1.0 million unsecured related-party note payable maturing December 15, 2013, bearing 5% interest.
- Investments: Marketable securities totaled approximately $2.45 million at April 30, 2012, including $2.22 million of available-for-sale securities and $230,012 of held-to-maturity securities.
Material Changes Versus the Prior Comparable Period
- Quarterly rental income increased by $391,509, while real estate operating expenses declined by $126,984. Administrative and general expenses increased by $113,977, primarily because of higher legal, professional and pension costs.
- Interest expense exceeded investment income by $115,364 in the quarter and $387,076 for the nine months, an improvement from $138,927 and $432,449, respectively, primarily because of debt repayments.
- The company paid off Jamaica, New York property loans of $2.09 million in September 2011 and $1.04 million in March 2012. These payments materially reduced cash and current debt obligations.
- Rent commenced in March 2012 on 18,218 square feet of newly completed office space at Nine Bond Street; the company funded approximately $2.16 million of construction and brokerage costs through operating funds.
- The Massapequa drive-in restaurant lease commenced in April 2012 and is expected by management to more than offset rent lost from the prior tenant.
- Discontinued-operations losses were zero in 2012 versus losses of $10,411 for the quarter and $187,771 for the nine months in 2011, contributing to the year-to-date increase in net income.
Outlook, Commentary, Risks and Unusual Items
- Management stated that current working capital and borrowing capabilities are adequate to cover planned operating and capital requirements. No quantified earnings or revenue guidance was provided.
- Income taxes provided increased to $709,000 for the quarter and $1.05 million for the nine months. A $389,000 deferred tax expense resulted from a change in the expected calculation of New York State and New York City taxes from a capital-based to an income-based calculation.
- Management identified risks including economic conditions, tenant financial condition, lease cancellations, access to credit, regulatory changes, competition, litigation, loan-covenant compliance and changes in accounting estimates.
- Two tenants accounted for 19.52% and 15.63% of nine-month rental income, respectively, indicating material tenant concentration.
- The company has various lawsuits and claims pending; management believes their resolution will not materially adversely affect the financial statements. A potential obligation to create a condominium unit at 25 Elm Place remains indeterminate if the property is sold, transferred, disposed of or demolished.
- All reported debt was fixed-rate; the company reported $6.79 million of fixed-rate debt and no derivative instruments, limiting exposure to changes in interest rates.
- Management concluded that disclosure controls were effective and reported no material weaknesses or significant deficiencies. No changes to previously disclosed risk factors were reported.
Important Facts for Investors to Verify
- Verify the sustainability and occupancy of rental income growth, particularly the new Nine Bond Street and Massapequa leases.
- Review tenant concentration, lease expirations, renewal terms and potential exposure to tenant defaults or cancellations.
- Assess liquidity after the substantial Jamaica mortgage repayments and compare available cash with planned capital expenditures and debt maturities.
- Examine the $389,000 deferred-tax charge and the potential for further changes in state and city tax calculations.
- Review mortgage terms, covenants and the remaining 2015 maturities, as well as the related-party note due in December 2013.
- Evaluate the pending litigation and the uncertain potential condominium obligation associated with 25 Elm Place.
- Reconcile reported earnings with operating cash flow and monitor unbilled receivables, which increased to $2.06 million from $1.61 million at July 31, 2011.