J.W. Mays, Inc. — Form 10-Q Summary
Business context and reporting period
J.W. Mays, Inc. is primarily a real estate leasing company with properties in New York. This unaudited Form 10-Q covers the three and nine months ended April 30, 2019, compared with the corresponding 2018 periods. The fiscal year ends July 31, 2019. The company had 2,015,780 shares outstanding as of June 6, 2019.
Key financial metrics
| Metric | Three months ended April 30, 2019 | Three months ended April 30, 2018 | Nine months ended April 30, 2019 | Nine months ended April 30, 2018 |
|---|---|---|---|---|
| Total revenues | $5.10 million | $4.85 million | $15.24 million | $14.43 million |
| Income from operations | $0.64 million | $0.43 million | $1.05 million | $1.20 million |
| Net income | $0.66 million | $0.32 million | $0.87 million | $3.17 million |
| Income per share | $0.32 | $0.16 | $0.43 | $1.57 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $3.40 million | $2.90 million |
- Three-month operating margin was approximately 12.6%, compared with 8.9% in the prior-year quarter. Nine-month operating margin was approximately 6.9%, compared with 8.3%.
- Three-month net margin was approximately 12.9%, compared with 6.6%. Nine-month net margin was approximately 5.7%, compared with 22.0%; the prior-year period included an approximately $2.4 million non-cash federal tax benefit from the Tax Act.
- Cash, cash equivalents and restricted cash totaled $6.96 million at April 30, 2019, including $5.33 million of unrestricted cash and cash equivalents.
- Property and equipment, net, was $52.44 million, compared with $50.79 million at July 31, 2018. Total assets were $67.87 million.
- Total liabilities were $13.91 million and shareholders’ equity was $53.96 million at April 30, 2019.
- The fixed-rate mortgage had a principal balance of approximately $5.34 million, bearing interest at 3.54% and due February 1, 2020. The balance was classified primarily as current, with no amount shown as due after one year. The company was seeking a five-year refinancing.
- Nine-month capital expenditures were $3.06 million. Planned and ongoing projects included elevators, building renovations, a lobby, HVAC work and other property improvements.
Material changes versus the prior comparable period
- Third-quarter revenue increased $245,078, or approximately 5.0%, primarily from higher rental income from existing tenants and a real estate tax refund.
- Third-quarter real estate operating expenses declined approximately 2.5%, primarily because of lower maintenance costs, partly offset by higher payroll and leasing commission expenses.
- Third-quarter administrative and general expenses increased approximately 6.9%, mainly from higher payroll, pension, legal and professional costs.
- Third-quarter net income more than doubled, partly because investment income and fair-value gains exceeded interest expense by $281,082, compared with net interest expense of $28,867 in the prior-year quarter.
- Nine-month revenue increased approximately 5.6%, while operating income declined approximately 12.5% because of higher real estate operating, administrative and depreciation expenses.
- Nine-month administrative and general expenses increased approximately 21.9%, including a $635,000 litigation settlement and higher payroll and pension costs.
- Marketable securities totaled $3.43 million at April 30, 2019, compared with $3.14 million at July 31, 2018. Following adoption of ASU 2016-01, changes in fair value were recognized in earnings; the company recorded a $143,209 nine-month fair-value gain.
- The company adopted the new revenue recognition, financial instruments, restricted cash and related accounting standards. The revenue standard had no material impact; adoption of the financial instruments standard increased opening retained earnings by $487,136.
- A 20,000-square-foot Massapequa tenant’s lease was terminated in April 2019 for nonpayment of rent, resulting in an anticipated annual rent loss of approximately $72,000.
Guidance, outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management stated that working capital and borrowing capabilities were adequate for planned operating and capital requirements.
- Management expected a medical-facility tenant at the Brooklyn property to occupy space and begin paying rent in fall 2019. Several other leases were extended, including significant retail and office leases in Jamaica and Brooklyn.
- The company expected approximately $1.8 million of elevator work at its Fishkill property to be completed in fall 2019 and approximately $1.5 million of lobby work to be completed in September 2019.
- The $635,000 Fishkill defective-workmanship litigation settlement was paid on November 6, 2018. Management believed other pending lawsuits and claims would not materially affect the financial statements.
- The company may incur an undetermined cost to create a condominium unit for a loading dock if it sells, transfers, disposes of or demolishes its 25 Elm Place property.
- The company participates in a multi-employer pension plan classified as critical and declining. Any withdrawal liability for unfunded vested benefits could not be determined, although management had not decided to withdraw.
- Key disclosed risks include tenant financial deterioration or lease cancellations, refinancing and credit availability, loan covenant compliance, litigation outcomes, construction-cost estimates, competition, regulatory and economic changes, and recoverability of claims.
- The company expects the new lease accounting standard, effective August 1, 2019, to increase reported assets and liabilities, with no material income-statement impact expected; the ultimate effect depends on the lease portfolio at adoption.
- Management concluded that disclosure controls and procedures were effective and reported no material changes in internal control over financial reporting.
Facts investors should verify
- Whether the $5.34 million mortgage was successfully refinanced before its February 1, 2020 maturity and on what terms.
- The effect of the Massapequa lease termination, tenant concentration and future occupancy on rental revenue.
- Completion costs, timing and returns from the elevator, lobby, HVAC and other capital projects.
- The recurring earnings trend excluding the prior-year tax benefit and current-period marketable-securities fair-value gains.
- Potential exposure from the critical-and-declining multi-employer pension plan and other pending claims.
- The balance-sheet impact of adopting the new lease accounting standard and the company’s ability to fund capital requirements while maintaining liquidity.