J.W. Mays, Inc. Form 10-Q Summary
Business Context and Reporting Period
J.W. Mays, Inc. is a New York real estate company that primarily owns and leases commercial properties. This filing covers the three months ended October 31, 2018, the first quarter of fiscal 2019. The interim financial statements are unaudited. The company had 2,015,780 common shares outstanding at December 6, 2018.
Financial Performance and Position
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Rental revenue | $4,996,584 | $4,785,026 |
| Operating income (loss), before investment income, interest and taxes | $(24,705) | $685,044 |
| Net income (loss) | $(79,194) | $395,395 |
| Income (loss) per share | $(0.04) | $0.20 |
| Cash provided by operating activities | $1,770,706 | $1,369,416 |
- Revenue increased approximately 4.4%, primarily from higher rental income from existing tenants.
- Total expenses increased to $5,021,289 from $4,099,982. The operating margin declined to approximately negative 0.5% from 14.3%.
- Real estate operating expenses rose to $2,812,056, driven principally by higher real estate taxes, maintenance and rent expense.
- Administrative and general expenses increased to $1,742,936 from $1,129,966, primarily because of a $635,000 litigation settlement accrual.
- Cash and cash equivalents were $6,147,991 at October 31, 2018. Including restricted cash, total cash reported in the cash flow reconciliation was $7,780,058.
- Total assets were $67,155,069 and shareholders’ equity was $53,014,018 at October 31, 2018.
- Mortgage debt totaled $5,397,344, consisting of $170,030 current debt and $5,227,314 long-term debt. The related mortgage bears fixed interest at 3.54% and is scheduled to mature on February 1, 2020.
- Capital expenditures were $822,175 during the quarter, compared with $1,025,229 in the prior-year quarter.
- The company paid no dividends in either comparable period.
Material Changes Versus the Prior Comparable Period
- The company moved from net income of $395,395 to a net loss of $79,194, principally because of the Fishkill litigation settlement and higher operating costs.
- Interest expense exceeded investment income by $51,489, compared with $79,649 in the prior-year quarter. Management attributed the prior-year amount partly to interest related to litigation.
- Operating cash flow increased by $401,290 despite the reported net loss, supported by depreciation, higher accrued liabilities and a reduction in prepaid expenses.
- Marketable securities declined modestly to $3,123,857 from $3,141,828. Beginning August 1, 2018, changes in fair value of equity securities were recorded in earnings rather than other comprehensive income.
- The company adopted new revenue recognition guidance without a material impact and adopted financial-instrument guidance that increased opening retained earnings by $487,136. It also reclassified $92,000 of tax effects from accumulated other comprehensive income to retained earnings.
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.
- Several leases were extended, including leases involving large retail and office tenants. A 7,700-square-foot medical tenant at the Nine Bond Street property was expected to begin occupancy and rent payments in early 2019.
- The company accrued and subsequently paid a $635,000 settlement related to defective workmanship and breach-of-contract claims involving its Fishkill, New York building. The settlement was paid on November 6, 2018.
- Additional construction and renovation projects were underway, including boiler upgrades, tenant renovations, elevator work, windows and other building improvements. Some projects had estimated remaining or total costs disclosed by management.
- Rental income is concentrated among a small number of tenants: three tenants accounted for approximately 16.16%, 13.81% and 11.95% of quarterly rental income, respectively.
- The company participates in a multi-employer pension plan classified as critical and declining. A potential withdrawal liability cannot be determined, although management had not decided to withdraw. The related union contract expires November 30, 2019.
- Principal identified risks include economic conditions, access to credit, tenant financial condition, lease cancellations, competition, regulatory changes, litigation, loan covenant compliance, recoverability of receivables and changes in accounting estimates.
- New lease accounting guidance is expected to increase reported assets and liabilities when adopted for the fiscal year beginning August 1, 2019; management expects no material impact on operations, although the ultimate balance-sheet effect depends on the lease portfolio.
- Management reported that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the final economic effect and any remaining obligations associated with the $635,000 Fishkill litigation settlement.
- Review the February 1, 2020 mortgage maturity and the company’s refinancing or repayment plans.
- Assess tenant concentration, lease renewal terms and the timing of rent commencement for newly renovated space.
- Monitor construction commitments and whether planned projects remain within disclosed cost estimates.
- Evaluate the financial condition and potential withdrawal exposure related to the critical-and-declining multi-employer pension plan.
- Reconcile cash and liquidity using both unrestricted cash of $6.1 million and restricted cash included in the cash flow presentation.
- Consider the effect of marketable-security fair-value changes on earnings following the August 1, 2018 accounting adoption.