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 discontinuance of its retail department store operations in 1989. This unaudited Form 10-Q covers the three months ended October 31, 2013, the first quarter of fiscal 2014, with comparison to the three months ended October 31, 2012.
The company had 2,015,780 common shares outstanding for the quarter and 2,015,780 shares outstanding as of December 4, 2013, excluding 162,517 treasury shares.
Financial Results and Position
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Rental revenue | $4.219 million | $4.195 million | Up 0.6% |
| Income from operations | $0.726 million | $0.948 million | Down 23.4% |
| Operating margin | 17.2% | 22.6% | Down 5.4 percentage points |
| Net income | $0.436 million | $0.501 million | Down 12.9% |
| Net margin | 10.3% | 11.9% | Down 1.6 percentage points |
| Earnings per share | $0.22 | $0.25 | Down 12.0% |
| Cash flow from operations | $1.464 million | $1.428 million | Up 2.6% |
Revenue included a $181,257 litigation settlement with a retail tenant at the Nine Bond Street property. Revenue was partly offset by a tenant vacancy at the Jamaica, New York property.
Real estate operating expenses increased to $2.152 million from $2.001 million, primarily due to higher real estate taxes, payroll costs, and bad debt expense. Administrative and general expenses increased to $918,048 from $844,069, while depreciation and amortization increased to $418,555 from $401,257.
Investment income was $189,424, including a $182,841 gain on the sale of marketable securities. This compared with investment income of $10,324 in the prior-year quarter. Interest expense declined to $98,545 from $113,862. The resulting pre-tax income was $817,024, compared with $844,774.
At October 31, 2013, total assets were $56.729 million, including $46.651 million of net property and equipment, $1.887 million of cash and cash equivalents, and $1.269 million of marketable securities. Total liabilities were $12.944 million and shareholders’ equity was $43.785 million.
Debt consisted principally of $5.378 million of mortgage debt due after one year, $173,317 of current mortgage debt, and a $1.000 million related-party note payable. The mortgage loans bear a 6.98% fixed interest rate and the outstanding balance is due February 18, 2015. The related-party note had a December 31, 2013 maturity and the company intended to refinance it through December 15, 2014 with the former director’s estate. Management reported fixed-rate debt of $6.551 million and no derivative instruments.
Cash increased by $1.222 million during the quarter to $1.887 million. Operating cash flow of $1.464 million was substantially offset by $1.439 million of capital expenditures. Financing cash outflows were $182,522, primarily reflecting debt payments and changes in security deposits.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, but operating income declined because operating, administrative, and depreciation expenses increased faster than revenue.
- Net income and earnings per share declined despite a significant increase in investment income, largely reflecting higher operating expenses.
- Marketable securities declined from $2.409 million at July 31, 2013 to $1.269 million at October 31, 2013, principally following sales or maturities.
- Property and equipment increased by approximately $1.016 million, reflecting capital projects and construction in progress.
- Accumulated other comprehensive income declined from $183,633 to $108,715, primarily because $86,187 of net unrealized gains were reclassified into investment income.
Guidance, Outlook, Risks, and Unusual Items
Management stated that working capital and borrowing capabilities were adequate for planned operating and capital requirements. No quantitative earnings or revenue guidance was provided.
The company leased 99,992 square feet at its Fishkill property in October 2013. Occupancy began in November 2013 and rent was expected to begin in January 2014. The related construction costs, including a new roof, were expected to be approximately $1.620 million.
Two Jamaica retail tenants did not renew leases expiring in August and September 2013. Management estimated annual rental income losses of $240,000 and $300,000, respectively. One tenant remained month-to-month through January 3, 2014, while the other vacated in October 2013. The company was seeking replacement tenants.
Other leasing developments included renewals of two Jowein building office leases, a five-year extension and expansion by a tenant at the Circleville, Ohio property, and settlement of litigation with a Nine Bond Street tenant that agreed to pay rent due and continue occupancy.
Planned or ongoing capital projects included approximately $1.620 million for Fishkill construction, $1.200 million for Nine Bond Street office renovations, $315,738 for elevator work, and $190,531 for additional tenant renovations. The filing does not provide a consolidated estimate of remaining cash requirements for all projects.
Risks include tenant vacancies and lease cancellations, tenant credit quality, litigation outcomes, availability and cost of financing, loan covenant compliance, changes in economic and regulatory conditions, construction cost estimates, competition, and the recoverability of receivables and other claims. Various lawsuits and claims were pending, but management did not expect a material adverse effect. The company also disclosed a potential obligation to create a condominium unit if its 25 Elm Place property is sold, transferred, disposed of, or demolished; the timing and cost cannot currently be determined.
Management concluded that disclosure controls and procedures were effective and reported no material weaknesses or significant deficiencies in internal control over financial reporting. The company stated that its previously disclosed risk factors had not changed.
Important Facts for Investors to Verify
- Whether the $1.000 million related-party note was refinanced or repaid after its December 31, 2013 maturity.
- Whether the mortgage debt due February 18, 2015 was refinanced, repaid, or otherwise amended.
- Actual lease-up and rent commencement at Fishkill and replacement leasing at the Jamaica property.
- Progress, final costs, and remaining funding needs for the Fishkill, Nine Bond Street, elevator, and tenant-improvement projects.
- Whether the litigation settlement and securities gain were nonrecurring and how they affect normalized earnings.
- The effect of tenant concentration: two tenants represented 19.20% and 15.23% of quarterly rental income.
- Resolution and potential cost of pending claims, including the possible 25 Elm Place condominium obligation.