Frp Holdings, Inc. Q2 FY2022 Earnings Call

Good morning. I’d like to welcome everyone to the FRP Holdings Second Quarter Earnings Conference Call. I will now turn the conference over to Chairman and CEO, John Baker. Mr. Baker, you may begin.

Thank you, and good morning. I’m John Baker, and I’m Chairman and CEO of FRP Holdings, Inc. And with me on the line today are David deVilliers, Jr., our President; David deVilliers III, our Executive VP; John Baker III, our CFO; John Klopfenstein, our Chief Accounting Officer; and John Milton, our General Counsel. Before we begin this call, together with other statements and information publicly disseminated by us, this call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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 even be anticipated. Future events and actual results, financial or otherwise, may differ, perhaps materially, from results discussed in such forward-looking statements. We have no obligation to revise or update such forward-looking statements other than imposed by law as a result of future events or new information. Investors are cautioned not to place undue reliance on such forward-looking statements. It is our pleasure to present to you the results of our second quarter and the 6 months ended June 30, 2022. Net income for the quarter was $657,000 or $0.07 per share versus $82,000 or $0.01 per share for the same period last year. The net income for the first half of 2022 was $1.329 million or $0.14 per share versus $28.455 million or $3.03 a share last year. As you recall, last year included a pretax write-up of $51.1 million on the remeasurement of our investment in Maren, offset by a 10.3% provision for taxes and $13 million attributable to noncontrolling interest for a net write-up of $27.8 million. The highlights of this quarter were continued strong royalty revenues, our highest second quarter and 6-month results ever, strong occupancy at our Dock 79 in Maren and mixed-use projects, and a 16% increase in net operating income for the quarter and a 24% increase in NOI for the first half. The gains in NOI are important and reflect our strategy to redeploy the gains from our warehouse sale into mixed-use and other industrial assets. Our after-tax earnings are impacted by losses from projects that are in the startup phase where they are experiencing depreciation, interest, taxes, and marketing costs without the benefits of a stabilized rent roll. They include our Bryant Street project in D.C., our 2 warehouses in the Hollander industrial park in Baltimore, and Riverside in Greenville. These projects with current year losses are progressing nicely, and they, along with The Verge project in D.C. and our second project in Greenville, 408 Jackson, will be next year’s growth engines for our NOI. We’re proud of our progress and appreciate your continued support. Now let me turn it over to our President, David deVilliers, to walk you through the details of our various projects. David?

Thank you, John, and good morning to those on the call today. Relative to our in-house industrial platform or asset management, one of the two speculative warehouses completed at the end of 2021, totaling 66,000 square feet, is now fully leased and occupied as of this past week. The 101,750 square foot build-to-suit building that will cap off the final building in Hollander Business Park should be ready for its tenant to occupy the full building in the fourth quarter of this year. Cranberry Run Business Park, our renovated 268,000 square foot multi-building warehouse park, became fully occupied in the first quarter of 2022. This park remains fully occupied and is performing ahead of original projections. The strength in our industrial pipeline, entitlements for the 55-acre parcel we purchased in Aberdeen, Maryland adjacent to Cranberry Run Business Park in late 2020, are underway, and we expect the annexation process to be complete by year-end. Building designed to create up to 675,000 square feet of warehouse product will follow early in 2023. Existing land leases for the storage of trailers on-site helped to offset our carrying and entitlement costs. We are hopeful we can begin construction here sometime in 2024. Finally, we have begun both entitlement procurement and building design to support an approximate 250,000 square foot warehouse building on our 17-acre parcel in the Perryman industrial section of Harford County, Maryland, not too distant from our other assets in Aberdeen. Depending on market dynamics, construction on this project could begin as early as the first quarter of 2023. Completion of these two aforementioned land development projects plus the build-to-suit warehouse currently under construction in Hollander will add over 1 million square feet of additional warehouse products to our industrial platform that, when added to assets in operation at the Hollander Business Park and Cranberry Run, will total over 1.4 million square feet. NOI for in-house operations was $650,000 for Q2 '22 versus $453,000 in the same quarter last year, an increase of 43.5%. As 2022 progresses, tenancy at the new buildings at Hollander and increased occupancy at the fully occupied Cranberry Run Business Park is providing a healthy lift to our NOI. In our Mining Royalty business segment, this division saw total revenues for the quarter of $2,883,000 versus $2,634,000 in the same period last year. As John mentioned in his opening remarks, this is record revenue for a second quarter in the Mining Royalties business segment. NOI was $2,747,000, an increase of 9.9% over the same period last year primarily due to the April purchase of the Blandford quarry property in Lake County, Florida. Moving on to our third-party joint ventures. As of the end of June, our joint venture platform includes 8 mixed-use projects in various stages of development and operation. Four are located in Washington, D.C., where MRP Realty is our joint venture partner. These projects are Dock 79, Maren, Bryant Street Phase 1, and Verge. Pre-leasing has begun at Verge, and we will be ready to welcome its first tenant in October of this year. Verge was 91% complete at quarter’s end. We have 2 multifamily projects in Greenville, South Carolina, where Woodfield Development is our joint venture partner. The first project, Riverside, began lease-up of its 200 apartments one year ago this month and was 91% occupied as of the end of the quarter. 408 Jackson will be placed in service in the fourth quarter this year and was 94% complete as of the end of June. The projects that make up the balance of our third-party joint venture platform are Hickory Creek with Capital Square and an office retail project with St. John Properties. Hickory Creek’s 294 apartment units remained above 95% occupied for the first half of this year, while our joint venture with St. John that includes 72,000 feet of single-story office and 28,000 square feet of retail remained 48% occupied at quarter’s end. So to summarize, relative to our third-party joint venture and mixed-use developments, Hickory Creek and Windlass notwithstanding, we are currently invested in 6 mixed-use multifamily retail projects totaling 1,827 apartment units with 125,750 square feet of retail. At quarter end, 4 projects, including Dock 79, Maren, Riverside, and Bryant Street, totaling 1,256 apartments, were in operation, of which 1,104 were occupied versus 646 occupied units at the same time last year, and 81,000 square feet of retail tenants were occupying their respective spaces versus 11,600 square feet at the same time last year. The remaining 571 apartments and retail spaces currently under construction will be completed and ready for occupancy by year’s end. FRP’s share of the net operating income for these 6 projects was $3,050,000 for the second quarter of 2022 versus $1,460,000 in the second quarter of 2021. That’s a 109% increase. Lending ventures, our last leg on our operating stool, this is a program where we provide working capital toward the entitlement and horizontal development of single-family residential projects and, ultimately, a sale to national homebuilders. The first of our 2 current projects is Amber Ridge in Prince George’s County, Maryland, with a total commitment to this project of $18.5 million. The investment includes a charged 10% interest rate and a minimum preferred return of 20%, above which a profit-induced waterfall determines the final split of proceeds. Land development is complete and only final public infrastructure needs to be closed out to complete the horizontal development at Amber Ridge. Two national homebuilders are under contract to purchase all 187 lots. 99 lots have been taken down with $13.04 million return, including interest, as of the end of the quarter. Our other current lending venture is called Presbyterian Homes. It’s a 344-lot 110-acre residential development project in Aberdeen, Maryland. We plan to provide up to $31.1 million in funding under similar terms to Amber Ridge. Entitlements are underway, and their success are the conditions precedent to settling on this roll-in. So we have lapped the 2-year mark on COVID-19. Despite the trauma that is with all in the world and many of those we know and love, FRP has been able to assist and accommodate our employees and tenants, every one of which has persevered and made it through. We have not lost a single long-term commercial tenant in our portfolio. This is a testament to the strength of our tenant base and our ability to shift and pivot where tenants have needed us to do so. In March of 2020, when the world shut down, FRP maintained a portfolio of some 510,000 square feet of operating industrial, office and retail space and 599 apartments. As of June 2022, FRP had 660,000 square feet of operating industrial office and retail space, with another 115,000 square feet due to deliver over the next 5 months, and 1,550 operating apartments with an additional 571 due to deliver in the next 90 days. So it’s safe to say FRP is in growth mode. We’ve never been more excited to share our story. Central to our growth and success is the solid financial foundation that enables us to capitalize on opportunities and to make hard decisions. Thank you, and I’ll now turn the call back to John.

Thank you, David. Let’s now open the floor for any questions any of our investors may have.

Our first question comes from Curtis Jensen of Robotti & Company.

I’ve got a few questions. One is on the mining royalties. If you were to exclude the acquisition, would the royalty revenues have been up kind of on a same-store basis?

I think they would have been just under $100,000 below. Late last year, I want to say Blandford mentioned that the acquisition was around $300,000. So it's a good thing we secured it.

Vulcan is actually mining at Fort Myers and in Northern Virginia on other properties, which obviously, we don’t like that much, but they have them. And it’s not that their business is falling off. Their business is strong.

Yes. And I guess you had a really nice bump in Q2 at Dock and Maren. And is that $3.5 million NOI kind of a good run rate for the rest of the year, and kind of going out into next year, do you think? Is that a reasonable assumption?

Well, we hope so. This is David deVilliers. For the quarter, both Dock and Maren saw their NOIs increase by about 16% each. We achieved notable increases not only on the renewals but also in the trade outs, where one tenant leaves and another comes in. We are maintaining strong occupancy rates in both buildings, averaging over 95%. Bryant Street is improving. It was significantly impacted by COVID but is starting to recover. By the end of the quarter, we were 78% occupied in the residential sector, and we're now slightly over 84% at the beginning of the month. So, things seem to be moving in the right direction, but Bryant Street was greatly affected by COVID. There’s still concern about COVID among everyone, especially since there are no passengers riding the red line that runs right by it.

Yes. Okay. Are there any kind of extraordinary COVID-related expenses that you were incurring at these properties that you think are in the process of going away? I mean, to your staff or supplies or anything that you’re...

It’s waning. It’s not over, but it’s certainly been reduced.

Okay. I have a couple more questions before I step aside. Regarding the home lending and homebuilder lending initiatives, how are they progressing compared to your initial expectations? Given the fluctuations in mortgage rates, the overall situation with homebuilders, and the inconsistent demand, how are things evolving in relation to your original forecasts?

We have two updates, Curtis. Amber Ridge is ahead of schedule, and we hope it stays that way. It's progressing well in terms of takedowns by the two homebuilders. As of the beginning of August, we're at $107 million, which is significantly better than our initial expectations. One important metric we monitor is the supply-demand ratio in Prince George’s County and Harford County, which shows that supply is very tight, with less than one month available. For the Presbyterian Homes project, we're currently working on entitlements, and we have wholesale land under contract with our borrower. The success of that project is a prerequisite for selling the land. We will assess the situation as it evolves, but we have a signed sale contract with a national homebuilder, who has made a substantial deposit. We will evaluate everything carefully as we approach the end of the year to ensure we make informed decisions.

Yes. It’s a pretty good size commitment. So I’d be curious to see how these things develop. And I guess the last question is there was, I guess, excess property at Brooksville was sold with a nice gain. Can you remind me what the kind of proceeds were on that sale?

Probably pretty close to the gain, if I had to guess. But I don’t know.

We’ll take our next question from Stephen Farrell of Oppenheimer.

I just have a few questions. I’ll be pretty quick here. What are you seeing for multifamily in D.C.? Are there opportunities at higher cap rates? Or are sellers kind of holding on? What’s the environment like there now?

This is Dave deVilliers. The environment is pretty much still the same. Pretty low cap rates for some of these, for the Class A type of buildings. It’s still been fairly strong, from what we understand.

And then do you think you’re sort of reaching an inflection point in terms of supply in the market there? Or do you think there’s room to go?

I think it depends on the specific submarkets. For instance, The Verge, our 344-unit apartment with 8,400 square feet of retail space on the first floor, is expected to open in September, provided we can secure the necessary furniture. This will be the only new building in that submarket. There are certainly other areas where the situation might differ, but in our location, we will be the new addition and attract residents for the long term.

But correct me if I’m wrong, David, that area at Buzzard Point is the next development opportunity in the Anacostia submarket. It’s not as fully developed as the area directly around the ballpark, right?

It’s considered part of it, but that’s true. It is. But even around the ballpark area, there’s not a whole lot of new ones coming online. There’s one other one coming on over by the Navy Yard. But to answer the question, there’s not a dearth of product that’s coming online over the next 6 to 9 months.

And then within industrial, obviously, we’ve had Amazon sort of re-leasing warehouse in other markets. Has that had any impact on the Baltimore market?

Not on the buildings that we have, at least at this point. It remains to be seen, but this is a strong Baltimore and going up 95% has been and looks like it will continue to maintain a really strong basis. We’re not seeing any indications. As a matter of fact, the rents are going through the roof and have been. I don’t know that that’s going to stay, but it’s been amazing what the rental increases have been up and down 95%.

Stephen, I would say that Baltimore is heavily impacted by the deepening of the harbor. So it’s not all e-commerce-driven. It’s driven by imports as well.

And just last question here. How are you viewing the investment pipeline in terms of the capital allocation, when you’re penciling out your new growth opportunities? Are you comparing that to share repurchases, especially given where the stock is now?

We constantly evaluate our approach to share repurchases. Our strategy is to buy back shares when we believe the stock is undervalued. However, our preference is to focus on growing the company when valuable projects are available. That said, we are committed to buying back shares when we see prices that we consider too low.

Yes, it hasn’t really been a choice between the two. Since the asset sale, we have had funds available for share repurchases as well as for investing in new projects. It’s been more about timing; when we find a project we like, we invest in it. If we see that the stock is at such a discount that it would be unwise not to repurchase, then we go ahead and repurchase it. So far, these two strategies have not been in competition with each other.

We’ll take our next question from Bill Chen of Rhizome Partners.

I’m able to make the call. I thought I couldn’t, but I was able to join the call. So good to hear from you guys. Got a couple of questions. Do we have a plan to host an Investor Day and possibly give investors a tour of The Verge this year?

We do not. I thought was that we would do those Investor Days every other year. I mean, that’s subject to change. If you all think it’s something we should do, we’re happy to do it. But I think given the size of our company, every couple of years is enough.

Okay. Let me talk with some new investors. I'll see if there are those who became shareholders this year and might appreciate an event. It could potentially be a smaller-scale event, but I will gauge the interest and update you all.

Thank you.

I don’t know if someone asked this earlier, but with Riverside now at 91%, I'm curious about the perspective on permanent financing. Additionally, how will this be reflected on the income statement moving forward?

Regarding the income statement, it will not be included in our income statement or balance sheet as Dock 79 and Maren were, because with Dock 79 and Maren, there was a control trigger that allowed us to sell the building. Consequently, we were able to consolidate it and write it up. We do not have that situation with Riverside. That is an opportunity zone and we are...

We only own 40%.

Are we going to be...

I was going to say, Bill, first of all, I think it’s 91% occupied. I wish it was 97%. And we have refinanced it.

Can you share what the amount of the interest rate was on that?

David, do you have that?

Yes, it was $32 million. It’s a $32 million 8-year loan, and it’s at a fixed rate of 4.92%.

Okay. Got you. Great. And I guess...

That was subsequent to the end of the quarter, just to be very clear about that.

That was subsequent to the end of the quarter. Okay. Got you. And will we start receiving distribution from that? Like with that, I guess, from the cash flow statement, would that show up as a distribution line item on the cash flow statement going forward?

The income from the property itself or from the refinancing?

From Riverside?

So the distributions for joint ventures that are making positive income will show up as cash flows from operations. So as soon as the property is turning to profit, then we’ll move to that area. In the meantime, it’s showing up in the investment section.

I understand. I think it's important to note that despite the 40% stake, there is significant value in those properties and their cash flow. Sometimes this value may not be reflected because it’s not consolidated. We've previously discussed this, and I believe it's essential for shareholders to grasp the performance of these properties and the cash flow being returned to the parent company. From my understanding, both Riverside and Jackson are expected to perform well, generating a considerable amount of cash flow. Making it clearer for shareholders to understand these dynamics will help illustrate the value created and the recurring cash flow in the future.

Thank you. We agree with you.

Thank you. It appears at this time we have no further questions. I’d like to turn the call back over to management for any additional or closing remarks.

Well, thank you all for those questions. We appreciate your interest in FRP. And as you can see, we’re in growth mode in a strong group of industry segments and markets. We’re mindful of the impacts of inflation and the rising interest rates and are, therefore, grateful for the strong balance sheet and positive cash flows from operations. For your information, we put together an updated slide deck with financial highlights from this quarter, which you can find in the Investors section of our website under Investor Presentations. We plan to update this for you each financial period, and we look forward to talking to you again next quarter. Thanks so much.

This concludes today’s call. Thank you for your participation. You may now disconnect.