Frp Holdings, Inc. Q3 FY2021 Earnings Call

Excuse me, ladies and gentlemen. We now have our speakers in conference. At that time, further instructions will be given as the procedure to follow if you would like to ask a question. It is now my pleasure to turn the conference over to Mr. John Baker. Sir, please begin.

Good afternoon. I'm John Baker, III, Chief Financial Officer and Treasurer of FRP Holdings. And with me today are David deVilliers, Jr., our President; John Milton, our Executive Vice President and General Counsel; John Klopfenstein, our Chief Accounting Officer; and David deVilliers, III, our Executive Vice President. Before we begin, let me remind you that any statements on this call that relate to the future are, by their nature, subject to risks and uncertainties that could cause actual results and events to differ materially from those indicated in such forward-looking statements. These risks and uncertainties are listed in our SEC filings. We have no obligation to revise or update any forward-looking statements except as imposed by law as a result of future events or new information. Now let me turn to financial highlights. Net income for the third quarter was $352,000 or $0.04 per share versus $5,455,000 or $0.57 per share in the same period last year. Some of this decrease is a result of lower interest income due to bond maturities and the fact that The Maren's permanent refinancing paid off our preferred loan to the joint venture, so we are no longer receiving a return on that loan. We also had an increase in interest expense relative to last year as a result of stabilization of The Maren prior to consolidating The Maren onto our books; our share of Maren's interest expense was included in the loss from joint venture line rather than interest expense. The Maren's increased interest expense is mitigated to some extent by the lower interest rate on the refinanced Dock 79 loan. However, the lion's share of this increase is attributable to a decrease in the gain on sale of real estate. We sold two properties in the same quarter last year for a gain of $5.73 million, and there were no such gains this quarter to offset that decrease. For the first nine months, net income was $28,807,000 or $3.07 per share versus $11,322,000 or $1.16 per share in the same period last year. The bulk of this is a result of the gain remeasurement of The Maren at $51.1 million, mitigated by a $10.1 million provision for taxes and $14 million attributable to noncontrolling interest. We also experienced $3.24 million in amortization expense of the $4.75 million fair value of Maren's leases in place as part of the gain on remeasurement. Finally, the gain on sale of real estate decreased by $8.5 million to $4 million compared to this period last year because of: One, an easement sale last quarter with a gain of $805,000 compared to sales during the first nine months of last year with gains of $9.3 million to $9 million. I don't want to delve too deeply into operations and spoil David's remarks. But I wanted to touch on a few operational highlights. This quarter, we completed the purchase of what we are calling our Chelsea property. This is a 17-acre tract in Harford County, Maryland, which we purchased in September for just under $2 million. It will support 250,000 square feet of industrial development, which we plan on building. We plan to start construction on that building at the end of 2022 once the entitlement work is done. This is another step in furthering our commitment to industrial development and bolstering our land bank as we move beyond our remaining developable land at Hollander. We are now into the second reporting period with a stabilized and consolidated Maren standing side-by-side with Dock 79, and both buildings are 100% commercially leased. Both buildings had average occupancies this quarter in excess of 95%. This is also the fourth quarter in a row where Dock 79 ended the quarter with occupancy greater than 94%, which is the first time that's happened with that building. So I don't think it can be overstated how impressive this accomplishment is, given that the streak, for a lack of a better term, began while The Maren was leasing up at an incredibly high rate and then continued past The Maren's stabilization. It speaks to both the desirability of the environment and the sense of place we and our partners have created, and it demonstrates that these buildings, the sum of the two buildings, is greater than the parts. They are just better together than they are on their own. Aggregates royalties income this quarter decreased compared to the same period last year, but it was up for the first nine months, making this the highest revenue total for this segment through the first nine months in its history. Our revenue total of $7.198 million through the first nine months is more than our royalties generated in any fiscal year prior to 2017. The first nine months is greater than any fiscal year prior to 2017, which I think is pretty incredible. This is the third quarter in a row where the trailing 12 months revenue for aggregates royalties exceeded $9.5 million. And prior to 2021, we had never achieved revenue that high in any 12-month period. We touched on this at our Investor Day, but this is the closest we've been in some time to the infrastructure bill becoming law. This is already a very busy time for the aggregates industry. Any additional demand, like the kind we see should this bill become law, along with stretched supply when supply is already stretched pretty thin, should lead to meaningful price increases. The bill has to become law, so fingers crossed. We still retain high levels of liquidity relative to our size with over $160 million in cash and bonds, as well as a $20 million line of credit. However, looking down our development pipeline, we believe, should everything go according to plan, that we will be able to put all of our cash to use and return it to you in the form of new investments. Now if I could turn things over to David deVilliers Jr. to walk through our segments in more detail. David?

Thank you, John. Good afternoon to everyone on the call today. During our recent Investors Day presentation in Washington, D.C., we discussed that FRP has been actively pursuing a four-part investment strategy aimed at increasing profitability and shareholder value. To expand on the details provided in the press release and the 10-Q, I would like to share insights into the four key areas of focus that have historically shaped FRP and continue to drive our operations today. These areas are: first, our in-house industrial and commercial development platform; second, mining and royalties; third, third-party joint ventures; and fourth, lending ventures. Regarding our in-house industrial commercial efforts, the Cranberry Run Business Park, which is our 268,000 square foot value-add project, was 96.6% leased at the end of the quarter compared to 78.6% the previous year. Today, I’m pleased to announce that the park is now fully leased, with total occupancy expected in early 2022. Our multi-tenant office building in Maryland is currently 95% leased and occupied. Our vacant lot in Jacksonville remains fully leased to Vulcan Materials until the first quarter of 2026. The net operating income from these three properties within our Asset Management segment was $468,000 for the quarter, down from $506,000 during the same time last year, largely due to the sale of our Hollander Spec building in July 2020. We also constructed two new speculative shell warehouses totaling 145,700 square feet at Hollander Business Park near the Port of Baltimore. These are state-of-the-art Class A concrete tilt wall buildings. Currently, 64% of the first building is pre-leased, and we are optimistic about the strong interest in the area. We expect to secure occupancy certificates for both buildings by the end of 2021. In the second quarter this year, we signed a lease for a build-to-suit facility of 101,750 square feet at 1941 Second Street, the last available lot in Hollander Business Park. Construction started in September, and we anticipate completion before the end of 2022, wrapping up all development at Hollander Business Park. This project represents the culmination of our development work on over 50 acres, resulting in the construction of more than 410,000 square feet across seven buildings. The development has transformed a previously blighted public housing complex and has created numerous jobs in Baltimore City. To support our industrial development efforts, we acquired a 55-acre parcel in Aberdeen, Maryland near Cranberry Business Park for $10.5 million last November. This project, known as Cranberry Run Business Center Phase 2, is poised to support 675,000 square feet of warehouse space in a thriving distribution market. We expect the entitlement process to extend into next year, and we've started the design work. Existing land leases are helping to mitigate our carrying and entitlement costs, with average monthly revenues from these leases exceeding $43,000 this quarter. We are hopeful to begin construction at this site sometime in 2023. In September, we completed the acquisition of 17 acres of industrial land, which John referenced earlier. We are currently designing and obtaining preliminary entitlements to construct around 250,000 square feet of warehouse space and hope to kick off construction in the second quarter of 2022. Lastly, we are under contract for a 130-acre industrial site in Cecil County, Maryland, conveniently located near Interstate 95, which can accommodate approximately 900,000 square feet of industrial development. If everything checks out, we aim to close on the purchase in the second or third quarter of 2022 after completing the necessary entitlements. To summarize regarding our warehouse platform: as of September 30, we have 268,000 square feet fully leased, 247,340 square feet under construction with 58.3% leased, and 930,000 square feet in the entitlement phase, with an additional 900,000 square feet under contract. This adds up to over 2.3 million square feet of warehouse development, marking a significant return to this sector since our sale of 4.1 million square feet in May 2018. Moving on to our Mining and Royalties segment, John III has already provided the highlights, so I will transition to our third area: third-party joint ventures. At the end of the quarter, Phase 1 of our joint venture with St. John Properties, comprising four buildings with a total of 72,080 square feet for office space and 27,950 square feet for retail in Baltimore County, stood at 48.1% leased and 48% occupied. Our 26.6% interest in the Delaware Statutory Trust that owns the Hickory Creek, a 294-unit garden-style apartment community in Virginia, is still maintaining occupancy above 95%, and we are receiving our monthly distributions. In terms of mixed-use developments, Dock 79 has averaged 95.94% occupancy for the quarter and was 94.8% leased at the end of the quarter, marking four consecutive quarters above 94%. Our tenant retention rate at Dock 79 stands at 57.8%. However, rental rates are currently stable due to government restrictions on rent increases linked to COVID-19, which are set to expire at the end of the year. Despite difficulties faced during the pandemic, our three retail tenants at Dock 79 are showing signs of recovery. The easing of restrictions and the return of stadium events has been beneficial. By early April this year, the remaining retail space was leased, and we are optimistic about achieving full occupancy by late spring next year. Dock 79 represents our first joint venture with MidAtlantic Realty Partners, where we hold a 66% ownership stake. In the second quarter, Phase 2 of our Riverfront on the Anacostia project, dubbed Maren, achieved stabilization with 90% occupancy for its 264 apartment units. This milestone allows it to join Dock 79, Hickory Creek, and our stabilized joint ventures segment. By the end of the quarter, 93.6% of the apartments were leased, and 95.5% were occupied. The average occupancy for the quarter was 95.92%, with a retention rate of 71.9%. All 6,900 square feet of retail space is leased, with 24% currently occupied, and the remainder is poised to open by year-end. This project is another collaboration with MRP, where they hold a 7.41% stake. As John mentioned, Maren received its final occupancy certificate in March 2020 and reached stabilization in under a year, showcasing its excellent location and management. Revenues for the quarter from both Dock 79 and Maren amounted to $5.2 million, representing a 101% increase compared to the previous year, mainly due to Maren's lease-up. Maren's revenue is recorded at $2.43 million, while Dock 79 generated $2.78 million, with an increase of $96,000 from the same period last year. The total net operating income from Dock 79, Maren, and Hickory Creek in the stabilized joint ventures segment was $3.1 million, a rise of $1.48 million, or 90.5% year over year, primarily due to Maren's contribution. Continuing with our development efforts, our Bryant Street project, which is a third joint venture with MRP, is transitioning from construction to operations. The first building, Coda, received its final occupancy certificate on April 1, and it was 95.5% leased and 93.5% occupied at the end of this quarter. Chase Building 1B opened in August and was at 48.1% leased and 23.5% occupied. Chase IA is set to receive its occupancy certificate this month and will also begin its leasing. Bryant Street Phase 1 will consist of 487 apartments across three buildings and 91,661 square feet of retail space, with 71,383 square feet or 78% of the retail pre-leased and expected to open soon. Our fourth joint venture project with MRP, called The Verge at 1800 Half Street in Southwest Washington, D.C., was 45% complete at the end of the quarter. This 10-story building will have 344 apartments and 11,246 square feet of retail and is scheduled for completion in the third quarter of 2022. This project is also located in an opportunity zone. With respect to our two joint ventures with Woodfield Development in Greenville, South Carolina, the first project, Riverside, is a 200-unit, three-building apartment development that started pre-leasing on August 1 and was 34.5% leased and 22.5% occupied at quarter's end. The second project, .408 Jackson, is a multifamily development with 277 units and 4,700 square feet of retail space. It is currently 70% complete and expected to open in the third quarter of 2022. In summary, we are currently involved in six projects through our third-party joint ventures, encompassing 1,827 apartment units and 127,000 square feet of retail. As of the end of the quarter, Dock 79, Maren, Riverside, and one building at Bryant Street with a total of 923 apartments were up and running, along with retail tenants occupying 10,500 square feet of space. The remaining requirements will come online over the next 12 to 15 months. Turning to our lending ventures, we are currently involved in two projects. The first, Amber Ridge, is situated in Prince George's County, Maryland, where we are the primary capital source, committing $18.5 million. This venture has a 10% interest rate and a minimum preferred return of 20%. Entitlements are complete, and land development is well underway, with two national homebuilders contracted to purchase 187 lots once the infrastructure is developed. At quarter's end, we delivered the first set of 16 finished lots, returning over $4 million in preferred interest and principal to FRP. Our newest lending project, Presbyterian Homes, located in Harford County, involves a commitment of $31.1 million to develop approximately 340 building lots. Similar to Amber Ridge, it also carries a 10% interest rate and a minimum return of 20%. The plan is to advance this project to the recording phase and, with binding contracts with a homebuilder, to initiate the horizontal development for finished lots. I would like to note the ongoing impact of COVID-19 in this update. Despite the Delta variant, FRP had a fruitful and active summer. Our retail and restaurant tenants are fully operational, and life is increasingly returning to normal. Our warehouse tenants continue to perform well, as seen in our leasing activity at Banbury Run and Hollander. We have effectively managed rising material costs and setbacks in construction, all while progressing through land development processes. We are fortunate that our team and partners have remained healthy throughout the pandemic. Operationally, we have adapted continually to meet new restrictions and safety measures to mitigate COVID's spread. From an investment standpoint, our warehouse sector is thriving, with construction materials generating record revenues. We are actively seeking new opportunities despite intense market competition. Smart timing for several of our multifamily and next-use projects has enabled us to capitalize on the renewed activity due in part to their unique features and strategic locations. Nonetheless, we anticipate ongoing limitations in retail and office leasing as some sectors face uncertainty amid regulatory and public health conditions. We remain cautiously optimistic, yet realistic about the pace of certain real estate developments. Our team has returned to the office, allowing for better collaboration and interaction. FRP is regaining its momentum, and we are eager for a return to more conventional daily operations reminiscent of the past 19 months. We are thankful that as an organization, we are firmly established and well-equipped to advance towards our mission that has guided us before and during the pandemic. Thank you, and I will now hand the call back to John.

Thank you, David. Now at this point, we're happy to open up the call for any questions that any of you might have.

Thank you, David. Now we are happy to open up the call for any questions that you may have.

It's Curtis Jensen. Just a few questions. First on mining royalties. The Vulcan lease at Fort Myers, it looks like in your presentation that expired in April of this year. Do you know if that was renewed? I know there was like a 15-year option for that merchant.

They exercised the renewal option.

No surprise. And just given sort of the growing demand regionally, are there any prospects for some of the other properties that are leased but not currently being mined to start mining?

Are you asking if the...

Yes. I think you have three properties leased to Vulcan and one to CEMEX. They are not currently being mined, but there is a lease in place and you are receiving royalties. I was wondering if there are any prospects for those properties for the tenant to begin mining.

The most imminent one of those to start in the next year is the CEMEX. They took a long time for that site to get permitted. And then, as part of their permitting, they have to improve County Road and connect from one part of the county to another and then build a plant. Part of the reason that the aggregates industry is so attractive in terms of the ability to raise prices and keep them up is that it's hard to get permitted, and CEMEX and what they've gone through; down Lake Louisa has proved positive of that. So long story short, they will get around to it. Some of the other sites, like Lake Sand, Vulcan lease is another part of the land adjacent to ours, and our reserves were limited, and you need a special type of dragline to get into those reserves, which requires getting it down there and is capital intensive. So we're basically mining the rest of the reserves before they turn around and get into ours. So that one is just going to be the minimum for a while. Forest Park, up in Georgia, has a ton of reserves underneath the plant. They also have a lot of reserves, but they just haven't gotten to. Obviously, they're not going to move the plant until they absolutely have to. And that's just where our portion of those reserves are. So again, it’s a long walk for a short drink of water: Lake Louisa is going to be the one that gets mined first. Lake Sand will eventually get mined. And Forest Park absolutely will get mined. I'm trying to think of the other two.

Maren's done.

Maren's done. And then I don't know about Air Grove, but they still have reserves or if they're completely done. But that's it.

Okay. And is Vulcan at work? I know they sounded like they shifted some of their operations. Are they going to return to debt operating back to where they were?

Yes, the property line kind of goes right through the middle of the pit. So that's just part of the mining there. You're sort of bouncing around from site to site. But I don't think there's a renewal on that lease. And there's a meaningful amount of reserves left there. And in the works, there's a long way to go in a short time, but they have every incentive to mine it. So they'll be back on that land probably pretty soon.

Okay. I don't want to dominate the questions here, but I have a couple more for Dock and Maren. The NOI for the quarter was $3.1 million. If you look ahead to 2022 and assume your retail is at 100%, you might see a slight increase in rent starting around Q2. Your financing is stable, of course. Have you started to consider what kind of budget NOI you would expect for 2022?

Yes, we have some ideas, but we prefer not to speculate on them in case we are incorrect, as that wouldn't be beneficial for you. It's just how we approached it.

And then I'll just shift over...

I would like to add to John's comment. The positive aspect is that government restrictions will soon be lifted. Previously, we were unable to implement rental rate increases or evict tenants for non-payment. This situation will change shortly, but we are currently about 60 days behind due to the lease-up program. While we remain optimistic, ultimately the market will determine our actions. We hope to perform as well, if not better, than we did this year.

Okay. And then you mentioned a new lending venture.

Yes.

I guess was that funded after the end of the third quarter? Or is it starting to be funded?

Yes. It's a long-term project. These things can go four to five years from the beginning all the way up through. But it's a $31.1 million commitment. And we're doing it the same way we did with Hyde Park, which we sold and made a pretty nice profit in Amber Ridge, but this is the newest one. We have a deposit in for the property and we're actually in parallel going through some entitlement work with the necessary government agencies. We don't have to buy the property until we get most of the entitlements already done.

All right. For the last question, considering your development at Hollander, with the addition of Aberdeen, Hartford, and now another site in an unnamed county, do you anticipate that over the next two to three years this could require another $50 million to $100 million, especially since there was a mention in the press release about utilizing all your cash?

When we start, we have a warehouse platform and pipeline that could reach up to 2.4 million square feet. We need to assess the right timing and market conditions to determine when to develop. If the market remains stable, we hope to be fully developed and progress in that direction.

Yes, expanding our land bank and developing more warehouses will be part of how we use our cash. Phase III, Phase IV, the site where Vulcan is currently located, and the Anacostia River will require significant cash investment from us. Additionally, there's potential for Bryant Street Phase II and possibly more development in Greenville. It will be spread across all of our different platforms.

But it sounds like there's pretty productive use for your cash over the next, call it, three to four years?

Yes.

Here comes our next question.

It's Stephen Farrell here. Well, I just have a few quick questions. In regards to the two industrial buildings at the Business Park being completed this quarter, are you seeing pressure there?

Well, they're almost done. So a lot of the purchasing was done; we were able to solidify a lot of the more expensive materials early on, but it's a little bit more expensive than the last one, yes. Rents are a little bit higher, too.

Okay. And if you look at the industrial pipeline, you mentioned earlier the 930,000 square feet in entitlement phase and another 900,000 under contract. If we go through the development of all that, is it correct to assume that you'd earmark about $140 million to $160 million to develop those?

Well, it depends on what the construction pricing is at the time. A lot of factors determine how we move forward. But I would say, yes.

Okay. And you just mentioned earlier, you also have the potential for Anastasia Phase III, Bryant Street Phase II. Do you expect over the next three or so years to be able to fund all these projects from cash? Or would you consider financing on some of the industrial projects?

Historically, we have financed our warehouse facilities with cash, and due to the joint venture nature of these mixed-use programs, we have secured construction loans. Once properly stabilized, we transition to permanent financing. This has been our process so far, and while there could be a change, it is likely the approach we will continue with moving forward.

Yes, Stephen, and part of that is a result of we do these warehouse projects entirely on our own. And so there's no partnership, no one else's capital constraints to consider, and we've got the cash to do it. And on the multifamily stuff, we're usually partners with people on these deals. And that's sort of the name of the game with the multifamily is you put debt on them. So we're sort of going along and getting along in that regard.

Okay. And last question. And you sort of alluded to it earlier. We don't know exactly when the rent freezes will be up. But if they do expire at the end of the year do you expect to be sort of aggressive in raising rents? Or are you going to focus on keeping occupancy where it is with a more gradual rent increase?

We evaluate our property management company with regard to those two projects, and for most of them, we have a software program that reviews every apartment daily. Our goal is to maximize rent within a certain balance. We don't want our renewal rate to exceed approximately 55% to 60%, as that would prompt us to consider raising the rent. However, we also aim to maintain good occupancy levels. It's a delicate balance, but we are optimistic about our current position. We hope to make slight improvements in the coming months.

Speakers, there are no further questions in queue.

All right. Well, if that's it, we really appreciate your continued interest in the company, and we're going to get back to work and try to make all some money. Thank you, again.

Thank you, ladies and gentlemen. This concludes today's teleconference. Thank you for your participation. You may now disconnect.