Earnings Call Transcript - FRPH Q1 2024

Operator, Operator

Good morning, everyone. Welcome to the FRP Holdings First Quarter 2024 Earnings Conference Call. The call is being recorded. I will now turn it over to our host, Mr. John Baker III, Chief Executive Officer. Mr. Baker, please proceed.

John Baker, CEO

Good morning. I'm John Baker III, Chief Executive Officer of FRP Holdings, Inc. And with me today are David deVilliers, Jr., our President; John Baker II, our Chairman; David deVilliers III, our Chief Operating Officer; John Milton, our Executive Vice President and General Counsel; and John Koppenstein, our Chief Accounting Officer. As a reminder, any statements on this call, which relate to the future are, by their nature, subject to risks and uncertainties that could cause actual results and events to differ materially as 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. To supplement the financial results presented in accordance with generally accepted accounting principles, FRP presents certain non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. The non-GAAP financial measure referenced in this call is net operating income or NOI. FRP uses this non-GAAP financial measure to analyze its operations and to monitor, assess and identify meaningful trends in its operating and financial performance. This measure is not and should not be viewed as a substitute for GAAP financial measures. To reconcile net operating income to GAAP net income, please refer to the segment titled non-GAAP Financial Measures on Pages 9 and 10 of our most recent earnings release. Any reference to cap rates, asset values, per share values or the analysis of the estimated value of our assets net of debt and liabilities are for illustrative purposes only as a reflection of how management views its various assets for purposes of informing management decisions and do not necessarily reflect the price that would be obtained upon the sale of the asset or the associated costs or tax liability. Now for our financial highlights on the first quarter. Net income for the first quarter was $1.3 million or $0.07 per share versus $565,000 or $0.03 per share in the same period last year. This 130% increase in net income over the same period last year was driven by a $95,000 decrease in interest expense and a $400,000 increase in interest income, a $600,000 decrease in equity and loss of joint ventures due to the lease-up of the verge as well as a slight increase in revenue and operating profit from better Multifamily and Industrial and Commercial segment results, offset by decreased royalties from the Mining Royalty segment and increased losses in the Development segment. Pro rata net operating income for the first quarter was increased 22% from $6.99 million last year to $8.53 million in the first quarter of 2024. This increase in NOI was primarily due to a 92% increase in Multifamily NOI as well as a 36% increase in Industrial and Commercial NOI compared to the first quarter last year. This increase in Multifamily NOI was driven partly by improved results at Dock 79 and the Merin compared to last year, but mostly by the addition of 2 assets to this segment due to 408 Jackson and Greenville and Bryant Street in Washington, D.C., achieving stabilization. Yesterday, we posted to our website a REIT slide show financial highlights for the first quarter. For those who have not yet seen it, we are now publishing an estimated value of our assets net of debt and liabilities. This sum of the parts analysis yielded a per share value in the range of $32.89 to $36.59 per share. Before I turn the call over, I want to congratulate David deVilliers III on his promotion yesterday to Chief Operating Officer. David, or D3 as he's known among his colleagues, is an invaluable member of our management team, which is not surprising because he studied at the feet of a master. David, on a personal level, if you'll indulge me, I just want to say how proud we are to have you as a member of the team, and we look forward to working with you in this new capacity as we start the next chapter in this company's history. I will now turn the call over to our new COO, David deVilliers III for his report. David?

David deVilliers, COO

John, thank you for those kind words. I'm humbled and look forward to filling this role. Allow me to provide an operational perspective on the first quarter results of the company. Starting with our Commercial and Industrial segment. This segment consists of 9 buildings totaling nearly 550,000 square feet, which are predominantly warehouses and all located in Maryland. At quarter end, the buildings were 95.6% occupied. Total revenues and NOI for the quarter totaled $1.45 million and $1.16 million, respectively, an increase of 36% and 47% over the same period last year. Moving on to the results of our Mining and Royalty business segment. This division consists of 16 mining locations, predominantly located in Florida and Georgia with 1 mine in Virginia. Total revenues and NOI for the quarter totaled $2.96 million and $2.76 million, respectively, a decrease of 10% and 12% over the same period last year. The primary reason for the decrease is due to a reduction of royalties at our Manassas quarry to resolve a calendar year 2023 $842,000 overpayment by our tenant, who overestimated a portion of production tons, which is shared with other property owners. As to our Multifamily segment, this business segment consists of 1,483 apartments over 117,000 square feet of retail located in Washington, D.C. and South Carolina. At quarter end, the apartments and retail space were 94% and 79% occupied. Total revenues and NOI for the quarter were $11.2 million and $6.8 million, respectively. FRP's share of revenues and NOI for the quarter totaled $6.66 million and $3.8 million, respectively. This is a significant increase over prior quarters due to our Bryant Street and 408 Jackson joint ventures being included in this segment as of January 1, 2024. As a same-store comparison, FRP's shares of revenues and NOI for the quarter totaled $3.35 million and $2.09 million, respectively, an increase of 2% and 4% over the same period last year. Now on to the Development segment. This segment is where we acquire, entitle, develop and create new income-producing assets that are transferred into our Commercial, Industrial and Multifamily business segments upon reaching certain completion and occupancy benchmarks. The segment uses capital to entitle and develop lands and fund our vertical construction endeavors with the goal of turning our non-NOI producing assets into NOI-producing assets. The segment also lends funds to strategic partners and ventures to prepare and develop lands for sale to national homebuilders in exchange for interest and/or profit sharing. In terms of our Commercial, Industrial, Development pipeline, our 259,000 square foot state-of-the-art Class A warehouse building located in the Perryman industrial sector of Hartford County, Maryland, is well under construction and expected to be delivered in Q4 of this year. We have entered into 2 new joint venture agreements with BBX Logistics. The first provides for the construction of a 200,000 square foot warehouse building in Lakeland, Florida. The site is centrally located along the I-4 corridor between Tampa and Orlando. Permits for the development should be in hand during Q1 of 2025. The second provides for the construction of some 180,000 square feet of warehouse product in 2 buildings in Broward County, Florida. The site is minutes from Port Everglades and the Fort Lauderdale Hollywood International Airport with frontage on I-595, accessing the Florida turnpike and I-95. Permits may be enhanced by the first quarter of 2025 as well. In Cecil County, Maryland, along the I-95 corridor, we are in the middle of predevelopment activities on 170 acres of industrial land that will support a 900,000 square foot distribution center. We look to secure permits in Q2 of 2025. Finally, we are studying multiple conceptual designs for our 55-acre track in Harford County, Maryland. Our various configurations should yield between 625,000 to 650,000 square feet of industrial product consisting of multiple buildings. Existing land leases for the storage of trailers on-site help to offset our carrying and entitlement costs until we are ready to build, which could be as early as 2025, pending favorable market conditions. Completion of these industrial commercial development projects will add over 2.1 million square feet of additional industrial commercial product to our industrial platform, growing the business segment from 550,000 square feet to over 2.7 million square feet. As to our Multifamily development pipeline, we have our newest project in the district known as Verge. At quarter end, the 344 residential units were 91.6% occupied with 45% of its 8,536 square feet of retail spoken for. Total revenues and NOI for the quarter were just under $2 million and $987,000, respectively. FRP's share of revenue and NOI for the quarter totaled $1.22 million and just over $605,000, respectively. Although our emphasis is on the industrial assets at this time, we will keep monitoring market conditions and their impact on 4 multifamily projects that reside in our Development segment. These projects represent over 1,200 apartments and 58,000-square feet of retail. Turning to our principal capital source strategy or lending ventures, I have the following updates to our 2 current projects. Amber Ridge in Prince George's County, Maryland, consisting of 187 lots is completely sold out. Final development activities to get off bonds are ongoing and upon completion of this project, interest income and profits are expected to total $3.8 million, a 20% profit on funds drawn. Our second lending venture, Presbyterian Homes, or Aberdeen Overlook consists of 344 lots located on 110 acres in Aberdeen, Maryland. We have committed $31.1 million in funding, $23.1 million was drawn as of quarter end, and over $5.8 million in payments were received to date. A national homebuilder is under contract to purchase all the finished building lots, and we expect to receive a minimum 20% profit on funds drawn. We also continue to entitle Hampstead Trade Center, which consists of 255 lots located in Hampstead, Maryland, and to explore second-life residential build-out options for acquirees in the South. The knowledge gained through our lending ventures has offered management a unique opportunity to leverage this development expertise, apply it to our mining lands and potentially scale this strategy while creating a second life for our mining lands. In closing, we remain pleased with the company's performance and excited about the growth potential being created in our development segment. Interest rates, inflationary pressures on expenses and construction costs, and existing supply and deliveries will continue to create headwinds and enhanced scrutiny for new development starts. We do continue to move forward and seek entitlements for our development pipeline with several permits expected in 2025. Upon receipt of these permits, management will remain patient, calculated and cautious in pulling the trigger on vertical construction. Thank you, and I'll now turn the call back to John.

John Baker, CEO

Thank you, David. The market conditions that David mentioned have led us to believe that focusing on industrial development is the best course of action in the near future. Currently, returns from industrial projects are better than those from multifamily projects, and they require less capital and are less dependent on debt. Industrial development has always been our area of expertise, and we look forward to advancing the projects we have planned. While we need favorable market and economic conditions, the five industrial projects David outlined represent an estimated $191 million in capital expenditure for the company, which we anticipate will yield a 6% to 7% net operating income on cost. Our ability to shift between asset classes is one of our company's strengths. The economy is strong, but profit margins have tightened, and costs have risen, necessitating skill and the right assets to successfully execute projects that benefit investors. We believe we are well-positioned to achieve this due to our solid balance sheet and our experienced management and operations team. Before we open the floor to questions, I want to take a moment to recognize our Chairman, John Baker II, who retired as CEO yesterday. The company was very fortunate to have John lead us for both his ten years as CEO. During his first term, he guided us through a significant financial crisis. In his second term, he facilitated the sale of our warehouse assets in 2018, which was not only a major liquidity event but also initiated a substantial transformation in the company's direction under his leadership. His career in the aggregates industry is remarkable, and he is widely respected among his peers. Personally, he is the greatest man I have ever known. As we move forward without him, I am honored to continue his legacy. We are now ready to answer any questions you may have.

Operator, Operator

And we'll go first this morning to Stephen Farrell of Oppenheimer Close.

Stephen Farrell, Analyst

Congratulations to you both.

John Baker, CEO

Thank you, Stephen.

Stephen Farrell, Analyst

I had a quick question. You mentioned financing a portion of the industrial cost with debt. And do you know how you would do that? Would you mortgage some of the existing properties or would it be a construction loan or corporate level debt?

John Baker, CEO

David, do you want to take that?

David deVilliers, COO

Sure. 2 projects that we would look to finance would be construction debt, and those would be the 2 Southern Florida assets.

Stephen Farrell, Analyst

And those are smaller in square footage compared to the other 2, correct?

David deVilliers, COO

Correct.

John Baker, CEO

Yes, compared to the 2 Baltimore projects that we have.

Stephen Farrell, Analyst

Yes. And how much would a similar LTV as your residential, about 50%?

David deVilliers, COO

We would test the market. We'd have to see where the rates and spreads are, and just look at the credit markets as we approach Q1 2025 to determine what makes sense. I believe you're correct, and the range seems to be around 50% to 55%. That would be my guess.

Stephen Farrell, Analyst

And how is Phase I with Steuart affected by the undertaking of these development projects in the next 18 months? How should we think about the timeline for development there?

John Baker, CEO

Steuart, we are aiming to secure permits by Q1 2025. At that point, we need to assess the wash-in market at Buzzard Point, as a significant amount of supply is coming online, which may not be ideal timing for us to proceed. Our balance sheet remains strong, and we have a partner for all three projects. If market conditions are favorable, we could move forward with these projects, but we have to ensure the market is right. Currently, there is no appetite to advance on Steuart from our side or theirs. This land has been in their family for many years, representing a significant opportunity for them. They are in no rush to proceed until everything aligns perfectly and the circumstances are favorable. They are not incentivized to act before that.

Stephen Farrell, Analyst

And when you first announced it.

John Baker, CEO

Sorry, what is your question?

Stephen Farrell, Analyst

When you first announced the deal, there was a four-year development timeline, with one building or phase expected every four years. There isn't a specific deadline for when this development must begin.

John Baker, CEO

Nothing prevents us from extending our agreement. David III was behind the contract between the Steuart family and us, along with MRP, and they created an agreement that works well for everyone because our incentives are aligned. We will not proceed with the land purchase until they give their approval, which won't happen if the land's value is low. Therefore, the market needs to be favorable for them to realize the full value of their property, and it must also be suitable for us to move forward. Our interests are completely aligned with the Steuarts, but the development will only take place when the timing is right.

Stephen Farrell, Analyst

And maybe I missed this. Was there any comment on rents for the Maren, Dock in Bryant Street?

David deVilliers, COO

We did not report on any of those. As it relates to rents, what can you tell us?

Stephen Farrell, Analyst

Just renewals

John Baker, CEO

Okay. At Dock and Maren, our renewals for the quarter were pretty strong. They were up, call it, 2.5% on both of those assets. Our South Carolina assets, 408 Jackson in Riverside, renewals were also strong. Renewals at 408 Jackson were about 3.5% and the trade-outs were 7.3%; Riverside was 1.6% on renewals and trade-outs were pretty flat; at Bryant Street, very strong; at Coda, renewals were 8.2% and trade-outs were 9.7% and Chase renewals were 4% and trade-outs were 7%; at Verge, it was relatively flat. It's a new project. It hasn't reached kind of occupancy and moved into our multifamily segment, but we're excited about where more things are going there.

Operator, Operator

It seems we have no further questions this morning. Mr. Baker, I would like to hand it back to you for any closing remarks.

John Baker, CEO

Thank you all, and we appreciate your continued investment and interest in the company.

Operator, Operator

Thank you, Mr. Baker. Ladies and gentlemen, that will conclude today's FRP Holdings first quarter 2021 earnings conference call. We'd like to thank you all so much for joining us and wish you all a great day. Goodbye.