J.W. Mays, Inc. — Form 10-Q Summary
Business Context and Reporting Period
J.W. Mays, Inc. is primarily a real estate owner and landlord. This unaudited Form 10-Q covers the three and nine months ended April 30, 2018, within the fiscal year ending July 31, 2018. The company had 2,015,780 common shares outstanding at June 7, 2018.
Financial Performance and Position
| Metric | Three Months Ended April 30, 2018 | Three Months Ended April 30, 2017 | Nine Months Ended April 30, 2018 | Nine Months Ended April 30, 2017 |
|---|---|---|---|---|
| Total revenues | $4.855 million | $4.952 million | $14.432 million | $14.560 million |
| Income from operations | $0.430 million | $0.924 million | $1.195 million | $2.190 million |
| Net income | $0.318 million | $0.606 million | $3.167 million | $1.392 million |
| Income per share | $0.16 | $0.30 | $1.57 | $0.69 |
| Cash provided by operating activities | Not separately provided for the quarter | $2.900 million | $3.450 million |
- Rental income increased to $14.432 million for the nine-month period from $13.674 million in the prior year. Total revenue declined because the prior-year period included $875,001 of revenue related to temporarily vacating leased premises and $10,952 of recovered real estate taxes.
- Approximate operating margin was 8.9% for the quarter and 8.3% for the nine-month period, compared with 18.7% and 15.0%, respectively, in the prior comparable periods.
- Approximate net margin was 6.6% for the quarter and 22.0% for the nine-month period, compared with 12.2% and 9.6%, respectively, in the prior periods.
- Real estate operating expenses increased to $8.492 million for the nine months, primarily because of higher real estate taxes and maintenance costs. Depreciation increased to $1.311 million.
- The nine-month net income increase was primarily caused by an estimated $2.4 million deferred tax benefit from the Tax Cuts and Jobs Act. This benefit increased reported earnings but did not provide cash.
- Cash and cash equivalents were $6.478 million at April 30, 2018, compared with $5.381 million at July 31, 2017. Restricted cash totaled $1.615 million, and marketable securities totaled $2.723 million.
- Total assets were $65.502 million and shareholders’ equity was $53.210 million at April 30, 2018, compared with $64.849 million and $50.000 million, respectively, at July 31, 2017.
- Mortgage debt totaled $5.468 million, including $167,002 due within one year. The mortgage bears fixed interest at 3.54% and is scheduled to mature on February 1, 2020. Management reported total fixed-rate debt of $5.508 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter net income fell 47.5%, while nine-month net income increased 127.4%, largely because of the noncash tax benefit recognized during the nine months.
- Third-quarter revenue decreased 2.0%; nine-month revenue decreased 0.9%. The quarter benefited from higher rental income from existing tenants and a new Jowein building office tenant, but lacked the prior-year lease-vacate revenue.
- Third-quarter real estate operating expenses increased 16.2%, causing the decline in operating income. Administrative expenses decreased modestly, while depreciation increased.
- Nine-month operating cash flow decreased to $2.900 million from $3.450 million, despite higher reported net income, primarily reflecting the noncash tax benefit and working-capital changes.
- Capital expenditures were $1.831 million for the nine months, including elevator, electrical, tenant-renovation, parking-lot and other building projects.
- Mortgage and other debt payments declined to $121,238 from $1.117 million in the prior-year period. Financing activities provided $176,415, primarily from increased security deposits.
Guidance, Outlook, Risks and Unusual Items
- Management stated that current working capital and borrowing capabilities are adequate for planned operating and capital requirements. No quantitative earnings or revenue guidance was provided.
- Several leasing and redevelopment initiatives are expected to support future rental income, including leased space at Nine Bond Street, Massapequa and other properties. Some new leases were expected to begin generating rent in late 2018.
- A 3,080-square-foot office tenant at Nine Bond Street notified the company in May 2018 of an intended October 2018 vacancy, resulting in an estimated annual rental loss of $112,000. A separate Jamaica tenant vacancy was expected to reduce annual rent by $58,000.
- The company is pursuing recovery of a $376,467 contractor deposit related to defective construction work at its Fishkill property. Contractors and subcontractors have asserted claims of approximately $700,000. The company disputes the claims; the ultimate outcome and net exposure remain uncertain. The company paid $189,248 under a prior court judgment in October 2017.
- The company participates in a multi-employer pension plan classified as critical and declining. A potential withdrawal liability cannot be determined, although management has not decided to withdraw.
- Other stated risks include economic conditions, access to credit, tenant financial condition, lease cancellations, competition, regulatory changes, loan-covenant compliance, litigation outcomes and recoverability of claims.
- The company expects adoption of the new revenue standard on August 1, 2018 to have no significant effect. Adoption of the new lease standard, effective for the company August 1, 2019, is expected to increase assets and liabilities but have no material effect on operations; the ultimate impact depends on the lease portfolio.
- Management concluded that disclosure controls and procedures were effective and reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Separate recurring rental-income performance from nonrecurring lease-vacate revenue and the $2.4 million noncash tax benefit.
- Track real estate taxes, maintenance costs and other operating expenses, which materially reduced operating margins.
- Assess the timing and expected returns of ongoing property improvements and tenant build-outs.
- Monitor tenant concentration: three tenants represented approximately 45.3% of nine-month rental income.
- Review the Fishkill construction litigation and the potential exposure of up to approximately $700,000, as well as the possible recovery of the contractor deposit.
- Evaluate upcoming lease commencements, anticipated vacancies and the company’s ability to maintain occupancy and rental cash flows.
- Confirm mortgage refinancing or repayment plans before the February 2020 maturity and assess compliance with applicable loan covenants.