J.W. Mays, Inc. — Form 10-Q Summary
Business context and reporting period
J.W. Mays, Inc. is a real estate company deriving substantially all operating revenue from rental properties. This unaudited Form 10-Q covers the three months ended October 31, 2015, the first quarter of fiscal 2016, with comparison to October 31, 2014. The company had 2,015,780 common shares outstanding at December 2, 2015.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Total revenue | $4.569 million | $4.643 million |
| Income from operations | $697,730 | $894,173 |
| Net income | $401,375 | $438,672 |
| Income per share | $0.20 | $0.22 |
| Operating margin | 15.3% | 19.3% |
| Net margin | 8.8% | 9.4% |
| Cash flow from operations | $1.291 million | $1.246 million |
| Capital expenditures | $821,347 | $404,643 |
| Ending cash and equivalents | $4.507 million | $2.687 million |
- Rental income was $4.277 million, supplemented by $291,667 of revenue recognized from the agreement to temporarily vacate leased premises. Recovery of real estate taxes was zero in the current period versus $10,625 previously.
- Real estate operating expenses increased to $2.409 million from $2.324 million, primarily because of higher real estate taxes and utility costs.
- Administrative and general expenses increased to $1.056 million from $983,293, including $57,000 of New York State and New York City capital-based franchise taxes.
- Interest expense declined to $64,577 from $108,692 following the refinancing of the mortgage at a lower fixed rate. Investment income was $7,222.
- Total assets were $66.465 million at October 31, 2015. Total liabilities were $19.698 million and shareholders’ equity was $46.767 million.
- Fixed-rate debt was reported at $6.900 million, consisting principally of the $5.900 million mortgage balance including its current portion and a $1.000 million related-party note. The mortgage bears interest at 3.54% and is due February 2020; the related-party note bears interest at 5% and matures December 15, 2016.
- Current assets were $10.386 million versus current liabilities of $3.896 million, implying substantial reported working-capital coverage. Management stated that liquidity and borrowing capacity were adequate for planned operating and capital requirements.
Material changes versus the prior comparable period
- Revenue decreased 1.6%, primarily because a retail tenant at the Nine Bond Street property stopped paying rent.
- Operating income declined 22.0% and net income declined 8.5%, reflecting lower revenue and higher operating and administrative expenses.
- Operating cash flow increased 3.7%, largely due to favorable changes in receivables, prepaid expenses and deferred tax items.
- Capital spending more than doubled year over year, increasing investment cash usage to $834,567 from $409,631.
- Cash increased by $421,544 during the quarter, compared with an increase of $793,874 in the prior-year quarter.
- The company recorded a $19,404 after-tax unrealized loss on available-for-sale securities in other comprehensive income, compared with a $42,162 gain in the prior-year quarter.
Guidance, outlook, risks and unusual items
- Management provided no formal earnings or revenue guidance. It expects rent to commence in February 2016 under an additional office lease and in summer 2016 under a new 20-year office lease.
- The new office lease is expected to require approximately $2.0 million of construction costs and approximately $500,000 of brokerage commissions. Construction was expected to be completed in spring 2016.
- A Jamaica, New York tenant planned to terminate its lease effective November 30, 2015, representing approximately $42,000 of annual rental income at risk.
- The company is litigating with a Nine Bond Street retail tenant over non-payment of rent since June 2015. Management estimated potential annual rental loss of approximately $450,000 and has accrued rent only to the amount of the tenant’s two-month security deposit.
- The company is pursuing a contractor to recover a $376,467 roof-replacement deposit and damages; the outcome could not be predicted.
- Management stated that other pending lawsuits and claims were not expected to have a material adverse effect, but noted that outcomes remain uncertain. A potential obligation related to creating a condominium unit for a loading dock at 25 Elm Place cannot currently be determined.
- The company participates in a multi-employer pension plan reported as being in critical status, with a rehabilitation plan and employer surcharge. Any potential withdrawal liability could not be determined, and the company had not decided to withdraw.
- Principal disclosed risks include tenant financial condition, lease cancellations, economic and competitive conditions, access to credit, loan covenant compliance, construction cost estimates, litigation outcomes, regulatory changes and recoverability of claims.
- Management concluded that disclosure controls were effective and reported no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the Nine Bond Street tenant dispute is resolved and whether rental income shortfalls become materially larger than accrued amounts.
- The timing, cost and leasing progress of the Jowein, Jamaica and Fishkill construction and improvement projects.
- Whether planned 2016 lease commencements occur as expected and generate the anticipated cash flow.
- The December 2016 maturity and renewal or repayment status of the $1.000 million related-party note.
- Potential obligations associated with the critical-status multi-employer pension plan and any future surcharge or withdrawal liability.
- The outcome and recoverability of the $376,467 contractor deposit and related litigation.
- The filing states that interim results are not necessarily indicative of the full fiscal year; investors should reconcile these results with the fiscal 2015 Form 10-K and subsequent filings.