Frp Holdings, Inc. Q2 FY2021 Earnings Call

Good morning. Thanks for joining us today. I'm John Baker, the Executive Chairman and CEO of FRP Holdings Inc. With me today on this call are David deVilliers Jr., President of the Company; David deVilliers III, Executive Vice President; John Baker III, CFO; John Milton, our General Counsel; and John Klopfenstein, our Chief Accounting Officer. Before we begin, let me remind you that this presentation may contain forward-looking statements. Such statements reflect management's current views with respect to financial results related to future events, and are based on assumptions and expectations that may not be realized and are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not be anticipated. Future events and actual results, financial or otherwise, may differ perhaps materially from the results discussed in such forward-looking statements. Risk factors are discussed in our SEC filings in annual, quarterly, and quarterly results. These forward-looking statements are made as of this date and based on management's current expectations. The company does not undertake an obligation to update such statements other than is imposed by law, and investors are cautioned not to place undue reliance on such forward-looking statements. The second quarter saw revenues and NOI growth, 45% and 37% respectively, versus the same quarter last year. Revenues were the highest in our history and the likelihood of passage. A federal infrastructure bill gives us an expectation that the royalty earnings will continue their secular growth. Net income for the quarter was $82,000, or $0.01 per share versus $4,149,000 or $0.43 per share a year ago. Driving this decline was the amortization of the leases as a result of last quarter's consolidation of demand and leases in place, which was part of the write-up of that asset. Also contributing to the decline in earnings was the interest on the now consolidated Marin loan and lower gains on the sale of real estate. Let me now turn it over to David deVilliers to walk you through our operating results.

Thank you, John, and good morning to those on the call today. I'll now offer some detail to the financial highlights provided by John in his opening remarks. Since 2018-19, dispositions of our warehouse platform totaling a little over 4 million square feet, we have been actively seeking value-add purchase opportunities, development lands for vertical construction, and new strategic partnerships. Additionally, we have continued to develop and construct projects upon our land inventory when available. In early 2019, we added an asset to our asset management business segment through the purchase of the Cranberry Run Business Park in Aberdeen, Maryland, a 268,000 square foot multi-building warehouse park that was in dire need of rehabilitation. We completed an extensive renovation of the business park and associated buildings late last year. Due to the nature of the short-term lease program at Cranberry, we have had some turnover, and at the end of June 2021 the park stood at 77.6% leased and 59.7% occupied versus 71.9% leased and occupied during the same period last year. Our home office is 95.1% occupied and we've recently completed a much-needed renovation of the first floor lobby and common areas. Total revenues for the asset management segment for the quarter were down 78.9% or $128,000 over the same period last year, to $588,000, mainly as a result of the sale of our 94,000 square foot industrial building at 1801 62nd Street in July 2020. We realized an operating loss of $160,000, down $218,000 from an operating profit of $58,000 in the same quarter last year, again, primarily due to the sale of 1801 62nd Street. Other assets in this segment remain leased and occupied as in previous periods. The mining and royalties business segment remains strong with revenues of $2,634,000, an increase of $232,000 over Q2 2020. This was the most revenue in any second quarter ever. Operating profit was $2,292,000, which represents a $182,000 increase over the $2,110,000 realized in this period last year. With respect to ongoing and new projects in our development business segment, we have several really strong highlights. One, at quarter's end, phase one of our joint venture was St. John properties consisting of four buildings totaling 72,080 square feet of single-story office and 27,950 square feet of small bay retail space in Baltimore County, Maryland, gained a retail tenant during the quarter increasing the percentage amount of lease to 48 with occupancy of 46.8%. These asset classes of office and retail have been hit especially hard by the pandemic. Our tenants at Winless, though, have kept current with their rental payments, and we are encouraged by some increased leasing activity here. After the sale of our 92,000 square foot warehouse at 1801 62nd Street in Baltimore, in July of last year, we were encouraged by the velocity of the submarket and began construction of two speculative shell warehouse buildings totaling 145,700 square feet at our Hollander Business Park near the border of Baltimore. Like their predecessor, these are state-of-the-art class A concrete tilt-up buildings with 28-foot and 32-foot clear ceiling heights built to the Baltimore City Green Building Standards. We are actively pre-leasing and have pre-leased 39% of one building and are encouraged by the continued activity in the submarket. We expect to complete and deliver both buildings in the third quarter of 2021. Also in the second quarter of this year, we executed a built-to-suit lease for a 101,750 square foot facility at 1941 62nd Street. This is the last building lock and Hollander Business Park. We plan to commence construction on this project in the third quarter of this year and expect to deliver the building to the tenant before the end of calendar year 2022. We can send you with the PUD entitlement process for our Hampstead Overlook Project, which is a 118-acre development tract in Hampstead, Maryland. The concept plan approved at the end of last year calls for 164 single-family and 91 townhome units. We are currently seeking preliminary plan approval from the local agencies, which is the next step in the development process. We are optimistic that 2021 will be the year of substantial progress towards this goal. As an update to our lending venture investments program, Tide Park in Baltimore County, Maryland is now complete. All principal and accrued interest have been repaid and preferred interest in shared profits totaling $1.03 million have been received. Another lending venture called Amber Ridge is located in Prince George's County, Maryland. Our total commitment for this project is $18.5 million. As with our Tide Park venture, the investment includes a charged 10% interest rate and a minimum preferred return of 20%, above which a profit waterfall determines the final split proceeds. Entitlements are complete, land development is fully underway, and two national home builders are under contract to purchase all 187 lots after the completion of the infrastructure development. The first set of finished lots is scheduled to be delivered to the purchasers in the third quarter of this year. On the joint venture front, at the end of 2018, we entered into our third joint venture with MRP to develop the first phase of a mixed-use residential and retail development project adjacent to the Red Line Metro Station in Northeast Washington DC, known as Bryan Street. As a transit-oriented development, immediate access to public transportation options is a critical feature in the design and marketing of this project. The first building named Coda was placed in service on January 1 of this year and received final certificates of occupancy on April 1, 2021, for all 154 of its apartments. Thanks to Herculean efforts from our leasing team, Coda was 88.3% leased and 67.5% occupied at the end of the second quarter. Of note, as of August 1, Coda was 93.5% leased and 85.7% occupied. With the leasing success of Coda despite COVID challenges, we are optimistic about the leasing velocity for the neighboring two buildings at Bryan Street called Chase. These two buildings are scheduled to be open and ready to receive tenants in mid-August. In total, phase one at Bryan Street will consist of 487 apartments in three buildings and 89,196 square feet of first-floor freestanding and open-air retail. 68,691 square feet or 77% of the retail is now pre-leased and expected to open for operations by year-end. This property is located in a designated opportunity zone, which allows us to defer a significant tax liability. In December of 2019, the company entered its fourth joint venture with MRP for the development of a mixed-use project at 1800 Half Street in Southwest Washington DC, in the Buzzard Point area, just a few blocks downriver from Marin and Dock 79. In August 2020, we began construction. The project, now known as The Verge, lies directly between our two acres on the Anacostia River, currently under lease to Vulcan Materials, and Audi Field, the home stadium of the DC United Soccer franchise. This 10-story structure will have 344 apartments and 11,246 square feet of ground-floor retail and is scheduled for completion in the summer of 2022. At quarter's end, The Verge was 27% complete. This project is also located in an opportunity zone. Also in December of 2019, we entered into two joint venture agreements with Woodfield Development to invest in two distinct projects in Greenville, South Carolina. Woodfield has vast experience developing residential and mixed-use projects throughout the Southeast and Washington DC. The first, called Riverside, is a 200-unit, three-building apartment project. Construction began in the first quarter of 2020 and is on the doorstep of completion. Pre-leasing efforts began the last week of July. The second JV with Woodfield is a 227-unit multifamily development titled 0.408 Jackson, a nod to Shoeless Joe Jackson adjacent to Greenville's minor league baseball stadium. This project will also include 4,700 square feet of retail space. Construction began in May of 2020 and should be complete in the summer of 2022. Currently, this project is 54% complete. Riverside and 0.408 Jackson represent a $15.9 million investment from FRP for a 40% ownership interest in these two South Carolina projects, which are both opportunity zone investments. The structure of these investments will ultimately allow us to defer a total of $4.3 million in federal taxes. Relative to our industrial development platform, late last year, we completed the purchase of a 55-acre tract of land in Aberdeen, Maryland. Adjacent to the Cranberry Run Business. Purchase price for this property was $10.5 million. This project will be known as Cranberry Run Business Center Phase Two, and can support up to 675,000 square feet of warehouse product in a robust distribution market. This purchase expands our industrial land holdings to allow us to continue the Industrial Development Program beyond the nearly complete Healthcare Business Park involved in Brazil. We are currently petitioning for annexation to bring all partner parcels that make up the assemblage into the same municipal boundaries. This process will take the rest of this year, and we have begun the design process. Existing land leases for the storage of trailers on-site will help to offset our carrying entitlement costs. Average monthly revenue from land leases for the second quarter was in excess of $42,000. We are hopeful we can begin vertical construction here in early 2023. Moving on to our stabilized joint ventures business, in July of 2019, we completed a partial 1031 like-kind exchange by investing $6 million or 26.6% beneficial interest in a Delaware statutory trust for DST that owns a 294-unit garden-style apartment community known as Hickory Creek located in Henrico County, Virginia. The complex was constructed in 1984 and substantially renovated in 2016. The business plan calls for further rehabilitation of the apartments, generating value-added rents prior to selling the project after an appropriate hold period. We continue to receive monthly distributions from operations at Hickory Creek. Q2 2021 distributions were $87,000 equal to a 5.5% per annum on our investment. Occupancy averages above 95% for this project. In March of this year, Phase 2 of our Riverfront on the Anacostia Project in Washington DC, known as Marin, reached stabilization at 90% occupancy of its 264 apartment units, and as a result of this milestone, joined Dock 79 and Hickory Creek in our stabilized joint ventures business segment. At quarter-end, 94.7% of the apartments were leased and 93.09% were occupied. Relative to the 6,900 square feet of first-floor retail, 100% of the space is leased, with occupancy currently scheduled for the third and fourth quarter this year. As with Dock 79, this is a joint venture with Mid-Atlantic Realty Partners, or MRP, of which FRP is the majority partner. Of particular note, this building received its final certificate of occupancy at the end of March 2020, and reached stabilization of 90% in less than 12 months. This is a testament to the quality of location and product delivered in the market and the skill and leadership on the ground managing the day-to-day operations. As a result of the quick stabilization of this project, and certain contractual obligations to our joint venture development partner, FRP's ownership interest in Marin is now 70.41%, down from 80% for our stabilization. Relative to Dock 79, its 305 apartments were 25.2% occupied on average year-to-date, and it was 94.1% leased and 96.4% occupied at quarter's end, marking a third quarter in a row with occupancy levels above 94%. Our retention rate at Dock was 61.4%, down slightly from 62.3% last year. Rental rates, however, were flat due to continued government-imposed restrictions on rent increases due to COVID. These restrictions are currently scheduled to expire at the end of the year. Dock 79 has fared quite well over the past year despite the significant interruptions we all experienced. Those seriously impacted by COVID with shutdowns, reduced capacity, canceled stadium events, and general uncertainty are our three retail tenants at Dock 79, which total approximately 10,500 square feet of the total 14,000 square feet of retail space, and seem to be holding there and have made significant headway towards normalcy with the loosening of some restrictions, warmer weather, better utilization of outdoor spaces, and stadium events with spectators. Of particular note, overage rental payments received for the second quarter were $120,000 for the three retail tenants. In early April, the remaining retail space became leased, and we look forward to filling retail occupancy in late 2021. Revenues for the quarter for both Dock 79 and Marin were $4.8 million, up 96.7% over the same period last year, primarily due to Marin's lease-up. Marin revenue represents $2.16 million and Dock 79 claims $2.66 million in revenue, an increase for Dock of $208,000 over the same period last year. NOI for the quarter in this business segment was a little over $3 million, up $1.38 million, which is 83.6% over the period last year. Thanks again to the addition of Marin to this business segment and its leasing success. We have touched a few times on the impact COVID has had on FRP. Despite the arrival of the Delta variant, summer is in full swing throughout our portfolio, and life is looking more normal every day. Major League and minor league baseball is back, bars and restaurants are open both inside and out. Trucks are moving goods, and tenants are leasing space. These are strong signals for us personally and as a business that new life, new energy, and new opportunities are happening every day. We have been extraordinarily fortunate that our warehouse platform is performing at least as well as it has historically; construction material needs have kept mining revenue solidly positive. We continue to identify new opportunities despite fierce competition for deals. And the timing for construction delivery of several of our multifamily and mixed-use projects has lent themselves to capitalize on the reemergence of activity. However, we have not been unscathed by the effects of this terrible globalization. And notwithstanding the good news, we do expect to see the continuation of limited retail and office leasing, as some business categories remain uncertain amidst the unique regulatory and public health plan. We are cautiously optimistic but also realistic. FRP has adjusted its operations, withstood infected employees and contractors, held the hands of tenants paralyzed by new government regulations preventing opening for business, and witnessed the terrible results of this global pandemic. Now, we have employees back in the office collaborating and interacting on a regular basis. And we are building back toward an FRP that is more recognizable than over the past 16 months. All the while we remain grateful that, as a company and group of professionals, we are solidly grounded and uniquely prepared to progress as an organization loyal to our mission that has served us well both before and during COVID-19. Thank you, and I'll now turn the call back to John.

Thank you, David. We will now open it up for questions from the floor.

Hi, guys. Good morning. I didn't realize I was going to go number one. Great results as always. I have a few questions, and I think I'll just run through them. What on the first quarter filing shows that the split work between FRP and MRP was 72.38%? I think there was some adjustment as MRP wound up getting a little more—what was the final split?

The final for the, what we started as, you know, we started out at 80%. And then as we started to get through the process, we had some early appraisals for video and some of those programs that took us to something that was much less than what ultimately the market value was determined for the building during our negotiations. So we recorded that our ownership at 72% for the end of the first quarter. And then we actually went through the process of the appraisals and that sort of thing and reduced our ownership a little bit further to the agreed-upon ownership percentage of 70.41% for FRP, and that's what we'll be going for.

So that's 70.4?

70.41, yes.

Okay. Gotcha. Thank you. On Bryant Street, I think you referenced that 67% of the retail is pre-leased, and I saw a recent article that gave a pretty good summary of the progress there. What is—I know Alamo is moving forward with opening that location? I guess what is the key remaining space that needs to be leased for Bryant Street?

Well, we have several different types of retail there at Bryant Street. We have, obviously, the Alamo, which is why we have what we call small shop retail, which is your basic inside retail. We also have a food hall concept that totals about 9,400 square feet. And then we have what we call an outside pop-up retail. And that’s an area for outside activities and that sort of thing, which is effectively 100% leased and waiting for its final certificate of occupancy. So the areas that will need the most lease-up are probably the small shop retail because that totals about 23,000 square feet across all four buildings, and we have 9,000 square feet of that pre-leased.

And that's 9,000 pre-leased, okay. The Metro car bar looks really cool.

That's the outside pop-up.

I'm jealous. You guys get to do some stuff that folks here in New York just don't have the chance to do, so that's really cool. Jumping around back to Dock 79, you mentioned that the overage payment on the restaurants at Dock 79 is $120,000. How does that compare to 2019, which is a more normal year?

Well, we weren't, we didn't have all three of them up and operating fully in 2019, so it's kind of hard to compare the two. But at least a couple of the restaurants that were operating fully are back to where they were in '19.

Oh, wow. Okay. That's fantastic. Can you update us again on the remaining space? That space that got leased, what's that concept for and how many square feet that was?

Bill, it's about 3,500 square feet. It's right on the Esplanade, and they are under construction there now. It's a kind of a little bit of a different concept. It's got a kind of a theme to it. There'll be more, I think, breakfast and lunch served there than certainly the other venues, so we think it works very well with the other venues that are there.

Thank you. That's helpful. On Riverside in Greenville, everything that I've been hearing about Greenville has kind of exceeded my expectations. I know that you guys have not started leasing yet, but in terms of the go-to-market asking rent, how does that compare to what you guys have previously budgeted for? I know it's kind of an unfair question, but everything that I've been reading about some Sunbelt multifamily rents is up double digits. So we're just wondering if Riverside is seeing a similar outlook on rent there.

Well, it's a little early to tell. Riverside is basically a three-building program. The first one, we did not do any real pre-leasing there prior to the occupancy; we just felt that that was a better plan for that. And the first building literally opened up last week. So I believe we've had like nine or ten pre-leases already. And they seem to be somewhat equivalent to the ones that were budgeted, but it's only early. We'll have a better idea next quarter.

Got you. I know my question is probably a little bit early, but the sentiment on the investment community towards Sunbelt multifamily has just been off the charts lately. And my last question would be on Bryant Street. I know Coda is kind of a more affordable product, and the leasing on them has been absolutely astonishing. Any thoughts on the remaining assets? I guess they're kind of 15% to 20% more expensive on a per square foot basis. Kind of views on demand for the remaining products?

Well, we just, again, with the success of Coda, we're obviously encouraged about the leasing velocity for these two buildings in Chase. These two buildings total about 150-some units per building, and we did not do any pre-leasing there because of trying to get Coda where it is; and obviously, the success of Coda has certainly bolstered our encouragement towards Chase. But it literally, I believe that Friday, we got the certificates of occupancy for the first couple of floors. So, again, it's a little premature to be able to answer that question, Bill, because we're literally three days into Chase, we've got a tremendous amount of activity there, but it's literally the tower without the ramps.

Got you. Thank you for that color. And one last question. In the filing, you mentioned that, you know, the rent regulation in DC, it's going to be February before we could actually increase rents in Dock 79 and Marin. You know, fewer in the air I guess, by that point be about two years before we raise rent in the Marin Dock 79. Finger in the air, what do you think the spread will be once we're able to increase rent? And then is it fair to assume something like a 5% rent bump when we're able to increase rents in Dock 79 in Marin?

I'm just kind of thinking two years, 2.5% to 3% a year that we weren't able to push through. Is that a fair assumption?

That's your assumption, I don't necessarily disagree, but it's a little early to tell. I mean, again, currently, the rent freeze is scheduled to expire in December, the end of December. We do these renewals and so forth and so on out about 60 days. So that takes us into February or possibly March. So, timing is important. You know, there's a psychological aspect to leasing spaces in the first quarter versus the second. So it's really kind of hard to tell. But you know, it's just too far off for us to really be able to offer that much of an opinion. A little color would be just the average rent and demand is $4 a foot, and the average in Dock is $3.50. So, I would expect that Dock would move up and of course, Marin frozen. And so hopefully, they'll be at least what you're saying.

Well, thank you, gentlemen, those are all my questions. Great results, and I look forward to being down there and seeing these assets in person sooner rather than later.

Thank you, Bill. Love to see you.

Good morning, everyone. I just have a quick question with respect to Bryant Street. Will that follow a similar path as the Marin and Dock 79, and that upon stabilization, you will refinance and consolidate, or is stabilization of all four buildings when that would happen?

It will not follow that Stephen because of the opportunities. We just had a different setup for that than for Dock 79. And in Marin, so, it'll stabilize and we'll refinance, but it will not consolidate onto our books because it doesn't have the same control trigger when it hits stabilization. So it will stay on the joint venture equity accounting.

And you expect that to happen for the Coda this quarter?

Has to be the whole project, but it's likely.

Okay, good enough. That makes sense, thank you. And in the next year, really, over the next quarter and two years, we have a lot of development projects in the pipeline that are coming to market. In the next two to three years down the line what's your outlook on capital allocation? Are you seeing opportunities now to add to the pipeline? Or will you begin to shift focus towards developing phases three and four of the Anacostia?

I think we look at all aspects of our business the same way. We'll see how Bryan Street goes; we're worth doing some free development in all of our areas that we don't so that if and when the time comes, we're not going through just the patent away to develop to go through the entitlement process that takes a long time in the District of Columbia.

And are you seeing a lot of other residential buildings coming into market right now too, or no?

Yes, there are other obviously developments going on in and around projects with Marin and Bryant Street. We think we've got some specific special programs at Bryant Street that a lot of the other developments don't have, not the least of which is a lot of open space and outdoor venue activity that most of the urban developments there do not have. Same thing holds true for Marin and Dock being down on the water. I like to think we have a leg up.

Stephen, to dig further into your question, we would go to a phase two at Bryant Street if phase one is as successful as we think. And so that's certainly part of our pipeline. You have phases three and four, down on the waterfront, and they're certainly part of our pipeline, and of course, Bryant Street will be coming on in the meanwhile too. So we feel like we have a long runway of projects that we're excited about. I can't stress how amazing the lease-up of Coda has been. I mean, this is a project that is transit-oriented, and the biggest amenity was the Alamo Theater. Our entrance, our ability to access transit has been zero, and obviously COVID has made transit less of an amenity. And we will open up Alamo in December. So the fact that we had incredible leasing activity without both of those having any attraction whatsoever was very encouraging. And so we're optimistic about the rest of that project.

Great, thank you for the additional color. That's all the questions I have.

Good morning. Just to clarify on Marin and there was no retail contribution this quarter, right?

Correct.

Can you share what you think that will do in terms of NOI on a run rate basis or something?

We have a lease with both leases are complete. I would say that the Solace, which is the taking of the large space on the water, I believe is about 5,500 square feet. Curtis, and I think they're going to generate about $220,000 plus or minus a year once they get opened up. And then the other one is a smaller area of about 1,500 square feet. And that's a license agreement with one of our outside pop-up vendors that are going to pay us a percentage of revenues. So, it's kind of hard to say, but that's kind of where we are right now. And these places really won't be up and running. There'll be some free rent that comes about in 2022, but I think once they get up and running, $250 plus is going to be where you are.

Okay. It seems that Marin estimated $1.38 million for the quarter starting April 1 on an NOI basis. Is that based on occupancy or something similar? Is that a reasonable estimate? It might have been derived from the press release.

Yes, that's about right, yes. I got to remember, we were still ramping up but we’d like to think I'm going to do better in three and four.

Are you guys being held up at all maybe might be more relevant for like the chase in terms of materials, appliances? You're getting appliances delivered and things like that, or is any of that eased up?

Yes, we've had our issues at Chase, obviously more than Marin. But we lost a couple of months, not a lot, but we lost a couple of months. We have excellent contractors. And we did a lot of that early on, and materials were committed to before COVID hit, but we lost a couple of months for sure. But the one of the things is that kind of Chase is opening up, we want to get it 100% buttoned up before we open it, which we did towards the end of last week. So, they're going to open up, they're opening up with all 333 apartments ready to go.

And just remind us again, what is the bridge supposed to be? When is that going to be finished or completed? Is that the end of this year? The Frederick Douglass bridge?

Yes, it's scheduled to be the fourth quarter of this year, and then the existing bridge coming down, all of that is scheduled to happen in the first and second quarters of next year. And they're on schedule, so I would say this time next year it will be done.

Alright, and I guess you, David, you had mentioned that I think the zero uses of the yield star software to kind of revenue optimization or whatever. And then I guess I was pretty astounded by how quickly the Coda ramped. And I know it's all about this trade-off between heads and beds you call it versus maybe Maxim. I mean, is there any human judgment around the yield star thing or they just…

Yes, we literally have leasing calls every week. So the baseline is still the software but, you know, we lean pretty heavily actual on-site leasing folks and both MRP and ourselves are, you know, are there as well. And then so there's a lot of collaboration that goes into these to the pricing of these units.

And how that asking rents compare at Coda say, square foot to.

To what, to the Chase or to what? What's that, like, there's what you're looking for?

Like on a per square foot or you said the Marin's at $4 or something, and I think John said, Dock at $3.50?

I want to say, Curtis, maybe John III or John take it up. Just under three bucks a square foot.

Yes, that's right, David, you know, there, it's obviously lower. It's just a different building type and not on the water, that sort of thing.

Yes, great. That's all I had. Thanks a lot.

And at this time, I'm showing no further questions.

Okay, well, thank you all for joining us today. Despite the pandemic, we're seeing tremendous progress in the lease-up of our new projects in both residential and industrial spaces. Lending ventures have benefited from the strong single-family lot demand and our royalties hit an all-time high this quarter. Our liquidity remains strong with cash and investments exceeding $170 million, despite a very healthy development menu. We appreciate your interest in FRP and look forward to talking to you again next quarter. Have a great day.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect your phone lines.