Earnings Call Transcript - FRPH Q4 2023

Operator, Operator

Good day, everyone, and welcome to today's FRP Holdings, Inc. Fourth Quarter Earnings Conference Call. Please note, this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Chief Financial Officer, John Baker, III.

John Baker, CFO

Thank you, Madison. Good morning. I'm John Baker III, Chief Financial Officer and Treasurer of FRP Holdings. And with me today are David deVilliers, Jr., our President and Vice Chairman; John Milton, our Executive Vice President and General Counsel; John Koppenstein, our Chief Accounting Officer; and David deVilliers, III, our Executive Vice President. 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 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 information. To supplement the financial results presented in accordance with GAAP, FRP presents certain non-GAAP financial measures within the meaning of Regulation G formulated 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 financial performance. This measure is not, and should not be viewed as a substitute for GAAP financial measures. To reconcile NOI to GAAP net income, please refer to the segment titled non-GAAP Financial Measures on Pages 12 and 13 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 from the fourth quarter. Net income for the fourth quarter was $2.88 million or $0.30 per share versus $2.76 million or $0.29 per share in the same period last year. Net income for the fourth quarter of 2023 when compared to the previous year was impacted negatively by an increase of $879,000 in equity and loss of joint ventures as well as an increase in interest expense of $188,000 due to less capitalized interest. Net income was positively impacted by an increase in interest income of $423,000 from increased interest earned on cash equivalents as well as improved revenues from our Industrial and Commercial segment. Fourth quarter pro-rata NOI for all segments was $7.55 million versus $6.26 million in the same period last year for an increase of 28.6%. Net income for 2023 was $5.3 million or $0.56 per share versus $4.57 million or $0.48 per share in the same period last year. Fiscal year 2023 was positively impacted by an increase in revenues and profits in all four segments compared to 2022 and an increase in interest income of $5.42 million from cash and cash equivalents as well as our lending ventures compared to last year. These were offset by an increase of $6.22 million in equity and loss of joint ventures compared to the same period last year. As we lease up the Verge and 408 Jackson as well as an increase in the management company in direct expense of $553,000 and an increase in interest expense of $1.2 million. 2022 was also positively impacted by $874,000 in gain from property sales, which we did not repeat in 2023. Revenue, operating profit, pro-rata NOI and net income all experienced strong growth. Compared to the fourth quarter of 2022, we grew revenues by 2.6%, operating profit by 17.2%, pro-rata NOI by 20.6% and net income by 7.8%. For fiscal year 2023 compared to last year, these metrics grew by 10.7%, 46.3%, 24.8% and 16.1%, respectively. Yesterday, we posted to our website a brief slide show of financial highlights for the fourth quarter and fiscal year. For those who have not seen it, we are now publishing an estimated value of our assets net of debt and liabilities or analysis yielded per share value in the range of $69.14 to $77.58. I will now turn the call over to David for his report. David?

David deVilliers, President and Vice Chairman

Thank you, John, and good day to everyone on the call. I would like to share some operational highlights regarding the company's fourth-quarter results. Firstly, we have renamed two of our business segments for clarity. The Asset Management segment is now called Industrial Commercial, and Stabilized Joint Ventures is now Multifamily. In our Industrial Commercial segment, we currently manage 9 buildings totaling nearly 550,000 square feet, primarily warehouses. At the end of the year, we achieved a 95.6% occupancy rate in this segment. Our full occupancy at three industrial buildings and Hollander Business Park in Baltimore, Maryland, along with rent growth at Cranberry Business Park in Harper County, Maryland, contributed to an NOI of $1.17 million for the quarter, reflecting a 46.1% increase from the same period last year. For the year, the segment generated an NOI of $3.9 million, an increase of $1.23 million or 46.2% compared to 2022. Regarding our Mining and Royalty segment, we saw total revenues of $2.9 million in the quarter, unchanged from the previous year's same period. NOI for this segment decreased by $169,000 year-over-year, but the annual NOI rose to $11.72 million from $10.15 million in 2022, a growth of 15.4%. In our Multifamily segment, Dock 79 and Maren, which comprise 569 apartments, had average occupancies of 96.4% and 94.7% respectively for Q4, with all retail space fully leased. Renewal success rates were 70% for Dock 79 and 61% for Maren, with rental rate increases of 1.6% and 2.75% on renewals. Throughout 2023, Dock and Maren maintained average occupancies of 95.6% and 94.36% respectively. Riverside in Greenville, South Carolina, with its 200 apartments, had 94.5% occupancy at the quarter's end, with 53% of tenants renewing and an average rental rate increase of 2.04%. Average occupancy for Q4 was 95.21%, and year-to-date it stood at 94.51%. The total NOI for our multifamily business segment in 2023 was $8.1 million, including $800,000 pro-rata from Riverside. Despite rent growth across all three properties, higher collection balances and operating expenses caused the NOI to level off year-over-year, considering the change in equity from the tenant and common sale to the Stewart family at Dock and Maren at the end of 2022. In the Development segment, we employed various strategies to expand the business, including industrial and commercial, multifamily, and principal capital source lending. These strategies grew our portfolio from one apartment project and four commercial buildings after liquidating our legacy warehouse portfolio in mid-2018 to over 750,000 square feet of commercial industrial space, 1,827 multifamily units, and several land parcels for further growth. Our industrial commercial strategy includes developing properties that are acquired, managed, and typically owned 100% by FRP, which transfer to the industrial and commercial business segment once the shell buildings are complete. We currently have three projects in our industrial pipeline at different development stages. In the second quarter, we broke ground on a 259,000 square foot state-of-the-art Class A warehouse on our 17-acre site in the Permian Industrial section of Harford County, Maryland, expected to be finished by the end of this year. In Northeast Maryland along the I-95 corridor, we are preparing for a 178-acre industrial land project that could support a 900,000 square foot distribution center or several smaller buildings depending on market conditions. If all goes well, we aim to break ground on this project by Q1 of 2025. We are also looking at various designs for our 55 acres in Harford County adjacent to Cranberry Run Business Park, with configurations potentially yielding 600,000 to 700,000 square feet. Existing land leases for trailer storage on-site will help cover our carrying and entitlement costs until we are ready to build, possibly as early as 2025. Completing these three industrial development projects will add over 1.8 million square feet to our industrial platform, bringing the total to over 2.35 million square feet. Since year-end, we established our first-ever industrial joint venture with BBX Capital for a 215,000 square foot warehouse development on the I-4 highway between Tampa and Orlando, Florida, with construction expected to begin in Q4 if market conditions are favorable. We also have a joint venture called Windlass Run with St. John's Properties, which is part of a mixed-use development in Whitemarsh, Maryland, including 3,300 residential units and over 3.5 million square feet of commercial space. Our project currently includes 100,000 square feet of single-story office and retail space, which was 87% leased and 78.3% occupied at year-end for the office and 38.2% leased and 22.9% occupied for retail. Our multifamily development involves collaborating with third parties where FRP typically remains the majority owner. These projects maintain a 90% occupancy level for 90 days before transitioning to the multifamily segment. We currently have Bryant Street and Verge in Washington, D.C., and 408 Jackson in Greenville, South Carolina under this strategy. Bryant Street, consisting of 487 apartments and 91,000 square feet of retail in three buildings, was 93.8% occupied at quarter-end, with retail components at 96.6% leased and 82.7% occupied. The project has a renewal success rate of 65% and rental rate increases of 3.8% as of quarter-end and will transition to the multifamily segment at the end of this quarter. Our newest project, Verge, received its final occupancy certificate in the first quarter of 2023 and is 90.7% leased and 85.8% occupied, with 45% of its retail space taken. Average occupancy for Verge during the quarter was 78.97%. 408 Jackson, our second mixed-use project in downtown Greenville, was placed in service in Q4 of '22 and was 95.2% leased and 93.4% occupied at quarter-end, similar to Bryant Street, this project will also shift to the multifamily segment at the end of this quarter, with an average occupancy of 93.7% and fully leased retail space opening this summer. We are nearing the finish line for leasing all three above-mentioned joint venture properties. Once stabilized and transferred to multifamily, this segment will encompass 1,827 apartments and 126,000 square feet of retail. Unlike developments in the industrial sector, our multifamily assets are operational, so you can see from the Development segment NOI in our press release that these assets generated over $5.46 million in NOI in 2023 compared to $3 million last year, despite an aggregate loss of $611,000 from 408 Jackson and Verge. Another area within development is our principal capital source program, where we provide working capital for the entitlement and horizontal development of residential land, presold before any infrastructure work begins, which is ultimately handed off to national homebuilders. This strategy includes a charged 10% interest rate and a minimum preferred return of 20%, with profit distribution structured accordingly. Our two current projects include Amber Ridge in Prince George's County, Maryland, with a peak capital of $12.8 million, where all 187 lots have been passed to homebuilders, and final development activities should be completed in the second quarter of this year, with expected interest income and profits totaling $4 million. Our other lending project is called Presbyterian Homes, now Aberdeen Overlook, a 344-lot, 110-acre residential development in Aberdeen, Maryland, with $31.1 million committed under similar terms as Amber Ridge. $20 million was drawn at year-end, and the national homebuilder is under contract to buy all finished lots, with horizontal construction having begun. By year-end, $4.5 million in interest and principal was returned to the company. In conclusion, we are pleased with the company’s performance and optimistic about growth opportunities ahead. Challenges we anticipated emerged in the final quarter of 2023 as we observed record-setting residential rents beginning to stabilize amid increased competition. Upcoming new apartments in Washington, D.C. will compete with our Waterfront assets, but three assets are stabilized, and we expect the third to stabilize before significant competitive apartment deliveries in late 2024 and early 2025. We have strong confidence in our design, amenities, and management teams, along with a careful approach to development. Navigating market fluctuations and competition is not unfamiliar to us; we are built on solid foundations and trust that challenges can lead to opportunities. With our dedicated and skilled team, FRP will keep expanding its portfolio and, as a result, its revenue and profits through a thoughtful approach to the market. We look forward to building on our successes and strengthening our position in the market. Thank you, and I'll now hand the call back to John.

John Baker, CFO

Thank you, David. As many of you saw in our subsequent event note in yesterday's earnings release, we announced a forward split of our common stock at a ratio of two post-split shares for every one pre-split share. As a thinly traded company with a small number of shareholders, we believe this has the potential to add some liquidity to our stock. At this point, we're happy to open it up to any questions that you might have.

Operator, Operator

We will take our first question from Curtis Jensen with Robotti & Company.

Curtis Jensen, Analyst

Hey, good morning. Can you hear me? Sure. Hey, John. I'm considering Bryant Street, and I don't believe we have permanent financing for that yet.

David deVilliers, President and Vice Chairman

Correct. Yes.

Curtis Jensen, Analyst

What's kind of the status there? And where do you see that? Is it just a function of waiting until rates get a little more attractive? Or...

John Baker, CFO

David can speak to this. Go ahead, David.

David deVilliers, President and Vice Chairman

Yes, I'll answer that, Curtis. Part of the situation involves getting the retail space occupied, which includes some initial free rent that's common in this business. We're currently waiting for that to happen, hopefully within this year. However, we're dealing with a floating interest rate and are hopeful that rates will start to decrease. Once that happens, we will look into securing permanent financing for the project. We initially arranged interim financing because the construction loan was due, and we still have a floating rate in place. The main factor is getting the commercial side up and running and achieving some level of stability, which will make it a better time to enter the market, especially as we anticipate interest rates may decline towards the end of the year.

Curtis Jensen, Analyst

When you say retail, is that mostly referring to the food court, like the little...

David deVilliers, President and Vice Chairman

We have two leases signed for about 8,000 square feet of inline retail that are currently under construction. It took a long time to obtain the necessary building permits from the local government. We also have letters of intent out for another location. We're working to finalize everything, but we are not rushing due to the current interest rates.

Curtis Jensen, Analyst

And how would you describe the Verge? Is it meeting your expectations?

David deVilliers, President and Vice Chairman

Yes, there are significant units expected to come online towards the end of this year, which will have a positive impact on that area. We will be more centrally located now, rather than on the outskirts, with about 1,400 units being developed further west of the bridge. These projects started right after COVID, and there was a notable lack of new construction during that time, coinciding with low interest rates. The good news is that we will have critical mass in some situations. However, it's important to note that there aren't any new projects planned after those two at the end of 2024 and early 2025. Overall, we believe we are in a strong position.

John Baker, CFO

Following up on David's comments, achieving permanent financing is certainly our ultimate aim, but this will only come after we successfully grow the net operating income to our envisioned levels. Currently, we wouldn't pursue permanent financing given our current NOI. Our focus is on increasing net operating income and enhancing property value so that by the end of the 10-year hold period in the opportunity zone, we have a solid asset with the right amount of debt—neither too little nor too much. We anticipate securing a favorable interest rate in a few years. Looking at projects like Bryant Street, Verge, Dock 79, and Maren, while the D.C. market isn't quite where we want it to be, we possess excellent assets and capable management. Although there has been an increase in supply, it doesn't match the quality of our properties. We believe this will position us favorably in the long term.

Curtis Jensen, Analyst

Your lending ventures, is the national homebuilder a publicly listed company? Have you named to the...

David deVilliers, President and Vice Chairman

It's NBR, it's NBR. They had a soft opening for the Aberdeen overlook property about four or five weeks ago. As mentioned earlier, we transferred 11 lots to them at the end of the year, and we have a substantial deposit from them as well. During their soft opening, over 400 people signed up for various products. While there's a difference between signing up and making a purchase, it's a positive indicator, and the area is beautiful, located in the center of the doughnut in Aberdeen. There is a lot of construction happening around them, particularly in retail, and a large hospital has opened nearby. We are really excited about the potential for Presbyterian homes, which has now been entitled with the opening of Aberdeen overlook.

Curtis Jensen, Analyst

All right. I'll jump off. Thanks and keep up the good work.

Operator, Operator

We will take our next question from Stephen Farrell with Oppenheimer.

Stephen Farrell, Analyst

Good morning. Just a quick follow-up on the D.C. market. Are you currently offering concessions at the Maren and Dock 79 small ones, if any?

David deVilliers, President and Vice Chairman

We saw our rent growth in Dock and Maren this year, with a 2.8% renewal rent growth in Dock 79 and a 4.21% rental growth in Maren. The trade-offs in Maren were 1.9%. The performance in Dock 79 wasn't as strong due to having to replace the on-site manager in the first couple of months of 2023, which impacted our occupancy. We focused on improving occupancy, but it affected our profitability a bit, resulting in some concessions. Everything is now stabilized, and we are in good shape.

Stephen Farrell, Analyst

And I might have missed this at the beginning. What were the biggest drivers in the operating expense growth at those two properties?

David deVilliers, President and Vice Chairman

They are significant across the board. We faced some utility issues, which were quite substantial. Additionally, security has been a growing concern in D.C., as in many cities, and we aimed to proactively address this issue. Consequently, security expenses were higher. Rent collections are gradually improving as we are now able to initiate the collection process that was stalled due to COVID, which prohibited evictions and court proceedings. There has been a significant backlog, but it is slowly being resolved. Previously, the process could take over a year, but it has now been reduced to about seven months, indicating we are moving in a positive direction. These are likely the two main factors contributing to the situation.

Stephen Farrell, Analyst

And we saw with Bryant Street when you refinanced the construction loan, the bank required us to commit some more capital. And I'm seeing this trend continue, whether it's construction loans or permanent financing that banks are refinancing at 50% to 60% LTVs as opposed to 70%. And I think there's an opportunity to provide a GAAP financing to the borrowers so that they can maintain their debt and equity levels. And I know FRPH is not a lender, but there was an opportunity to provide that GAAP financing along with the equity component. Would you consider it?

David deVilliers, President and Vice Chairman

You mean the Bryant Street?

Stephen Farrell, Analyst

No, for general properties.

David deVilliers, President and Vice Chairman

Just generally? I would probably say no. We have a strong development pipeline and are focusing more on the industrial side in the near term, but we also have excellent locations and good projects in the multifamily sector. We want to maintain as much liquidity as possible, so I don't see us becoming mezzanine lenders or pursuing that type of financing.

John Baker, CFO

No, I think you're absolutely right, David. We plan to use our equity to protect our own assets, but I want to emphasize that we are more than comfortable with our current exposure to the D.C. apartment market. We're not seeking additional exposure, and we would need to be very knowledgeable about another asset or market before considering that. I don't believe that's the best use of our time or resources. While it is an interesting opportunity, we simply do not have the capacity to take on another investment strategy.

Stephen Farrell, Analyst

Now that's understandable. And with Amber Ridge, all the lots are sold, is there any more interest or principal payments that will come in from that?

David deVilliers, President and Vice Chairman

Pretty much, no. We're just kind of wrapping it up. There's not a whole lot left, Stephen. There's some closing out of bonds and that kind of stuff before we can close the...

Stephen Farrell, Analyst

David, correct me if I'm wrong, but aren't there some funds that are going to be released? I believe the overall expected return of capital, which includes the return of principal, interest, and profit, is $22 million. Currently, we've received $20.2 million.

David deVilliers, President and Vice Chairman

Yes, from a cash standpoint, we are still holding roughly $700,000 as the lender to complete some of the remaining programs. We haven't finalized the actual interest and profit to FRP, but we believe it will amount to about $4 million, which will likely be accounted for sometime in the first or second quarter.

Stephen Farrell, Analyst

Last question before I turn it over. The warehouse in Aberdeen, how much development cost was funded in 2023?

David deVilliers, President and Vice Chairman

I think it was about 7, which would have been about $17 million. John, are you there? Can you help me with that?

John Baker, CFO

$16 million is what I remember, but...Yes, I look I was actually looking at the Amber Ridge issue. What was the question again?

David deVilliers, President and Vice Chairman

No, I don't have it. For the speculative buildings, we incurred approximately $9 million in 2023.

Stephen Farrell, Analyst

Plus the land gets to the 30%?

Operator, Operator

We will take our next question from Bill Chen with Rhizome Partners.

Bill Chen, Analyst

Hi guys. Good to have you join the call. Could you provide a little more detail on the Florida industrial joint venture?

David deVilliers, President and Vice Chairman

Yes, we've always aimed to expand our multifamily platform and program by identifying the right people and locations for our projects. I have a relationship with someone in Coral Gables, Florida for 20 years. They approached us late last year with a project located between Orlando and Tampa, right along a major thoroughfare. The market there is very strong for a 215,000 square foot building that we are developing. If everything goes as planned, we expect to begin construction in the third quarter of this year. We have strong partners on the ground, including BBX Logistics, a subsidiary of PBX Capital, which is a public company with a solid financial background and a history dating back to the late 60s. There is a great cultural and personal synergy between our companies, and we are excited about this opportunity.

Bill Chen, Analyst

Could you discuss the relative mix of equity ownership? Would FRP own more than 50%? Will this be another equity line item, or will it be consolidated? Please elaborate on that.

David deVilliers, President and Vice Chairman

We're going to hold a controlling ownership interest. We are likely to acquire around 10% to 20% of their ownership at retail while maintaining our 80% or 90% at wholesale. This approach will prevent us from overspending on our partners, allowing us to manage our investments carefully.

Bill Chen, Analyst

Let me clarify that FRP will be the controlling holder in this project with an ownership stake of 80% to 90%. Is that correct?

John Baker, CFO

Yes.

Bill Chen, Analyst

And I guess their role is to be boots on the ground, almost like the actual developer, they don't know work. Is that kind of the nature of the relationship?

David deVilliers, President and Vice Chairman

Yes. So we will be actively involved. I mean, again, we've been in the industrial business for over 30 years. And so they're going to lean on us for the design. We certainly have done a month of these. They have, to some extent, too. And so I think it's a really good relationship and a good balance.

Bill Chen, Analyst

Got you. Okay. If you don't mind, can you share what potential stabilized unlevered yield we are underwriting on a project like this?

David deVilliers, President and Vice Chairman

We haven't decided, but it's been on a straight return on cost basis. it's going to be above 6.5% or we won't start it.

Bill Chen, Analyst

That's very helpful. Is there a possibility that the projects in Maryland could achieve an unlevered yield of 8% or even higher? Can this project potentially reach those kinds of numbers?

David deVilliers, President and Vice Chairman

Sure. We hope so. The market is large and robust with minimal vacancy. You understand how this operates, and we only initiate projects when we feel confident in the readiness of the symbol. We are not obliged to take any action; we simply want to ensure that we have contractors prepared, numbers calculated, a guaranteed maximum price established, and a thorough analysis of the market.

Bill Chen, Analyst

Speaking on contractors, have you seen that the GC world kind of like, call it, capacity pull it to slack whatever you want to call it, just get a little bit better from like a development perspective?

David deVilliers, President and Vice Chairman

If you're saying, are there prices getting tighter? Is that your question?

Bill Chen, Analyst

The price is getting better, timelines improving, whatever you may be or just cost coming down, being able to move faster, more willing to work with you, et cetera?

John Baker, CFO

Thank you for your comments, Bill. All of them are positive. We currently have a 259,000 square foot building under construction, which we are managing in-house through our subcontracts. From that perspective, we are noticing a slight decrease in pricing and an improvement in timelines. While they haven't fully returned to previous levels, they are definitely getting better.

Bill Chen, Analyst

I appreciate the feedback on that. I have a significant question for later, but I want to take a moment to thank the team for the stock split. I understand that no one will actually own more shares, but I believe it will enhance liquidity as the share price decreases, potentially tightening the bid-ask spread. This will aid trading, so thank you for taking that initiative. It shows that you are considerate of the shareholders. I also commend the company for the share buyback. I've mentioned before that buying back shares at $54 was a good price, especially considering a recent transaction I'll discuss. Even at today's prices in the low 60s, I still think it's a wise use of capital. I recognize that much of the cash is designated for various projects, but the company is also generating significant cash flow. I’ll always support more share buybacks, so well done on this initiative. My final question relates to Martin Marietta's recent announcements regarding two transactions: Bluewater Industries and another project. Based on my calculations, they spent approximately $2.5 billion for those transactions and acquired about $1 billion in reserves, which suggests a value of around $2.50 per ton of aggregate reserves. Many markets are comparable, and it’s plausible that FRP's market in Georgia and Florida is growing even faster than those others. Using a simple calculation of $2.50 per ton of reserves times $500 million, it’s reasonable to assume that the royalty structure and land ownership could account for at least half of that, which would place the value at $1.25 per ton of reserves. Multiplying that by 500 million tons gives an aggregate business valuation of about $750 million. I'm just trying to understand if that's likely on the higher end. If you apply an EBITDA multiple, you would need to adjust for the fact that there's minimal CapEx or the royalty structure. This leads me to estimate a value of between $400 million and $750 million for the aggregate business owned by FRPH. Do you have any insights on this? Does what I'm saying make sense, or are there significant differences in those two deals that I should consider, especially if half of the value comes from the royalty structure and land ownership? And any additional feedback you can provide on these points would be appreciated.

John Baker, CFO

Bill, I appreciate your $750 million valuation. I would consider that valuation to be quite high, but I understand your optimistic outlook on the aggregates industry. I have some knowledge about the Martin acquisition of Bluewater Industries. I would guess that they based the deal more on EBITDA rather than reserves. It seems likely that they wouldn't have proceeded with the transaction unless it was beneficial to them. When looking at their EBITDA multiples, it would likely be close to that range or just below it. I believe this is a sensible approach to valuation. While this can get quite detailed, a better way to assess our royalty stream might be to apply an EBITDA multiple to the revenue rather than our net operating income. That revenue is reflective of their EBITDA, and it is important to consider associated costs and overhead, which do influence our NOI. However, I think this remains the best approach. A multiple takes into account perpetuity, including reserves, but I doubt any operator values a deal solely based on reserves or tonnage metrics during acquisitions. Our method of valuing our reserve stream doesn’t consider the future potential of the mining lands, and how one values that second life might differ significantly. Many factors are emerging, some with more immediate implications than others, but I can assure you that an EBITDA multiple doesn't factor in considerations like that. So, feel free to assign your own value, but you would be right in thinking that applying an EBITDA multiple could indeed understate the value of the royalty and the lands associated with it.

Bill Chen, Analyst

I have been a shareholder since 2015, and I have observed the growth of this royalty business over the years. It has generated cash flow with only two acquisitions and no Capital Expenditures. The total acquisitions amount to under $25 million, one in 2012 and a recent asset. Unlike Martin Marietta, which needs to replace worn machinery, our business has not incurred CapEx. I believe the appropriate multiple should focus on EBITDA less CapEx since CapEx could represent a significant portion of EBITDA for companies like Vulcan or Martin Marietta. If CapEx is around one third of EBITDA, then the EBITDA multiple may not accurately reflect our value, suggesting a need to consider EBITDA less CapEx for a true comparison. Having been a shareholder for nine years, I haven't seen any CapEx with our royalty structure, and I would like your thoughts on this perspective.

John Baker, CFO

I think that's an interesting way to think about it. And we would just need to kind of idle on that a little bit more. That's insightful.

Bill Chen, Analyst

At the end of the day, I'm focused on the advantages of real estate and new asset investing, particularly because depreciation often reflects the reality. I'm trying to assess owner earnings, and as a shareholder, I have been pleasantly surprised that the owner earnings in this overall business have consistently exceeded any cash flow metrics or multiples. This trend has been a positive surprise for me. I believe that relying on an EBITDA multiple does not accurately reflect the situation, and an EBITDA less CapEx or EBIT multiple provides a much clearer measure. Just wanted to share some thoughts on this.

David deVilliers, President and Vice Chairman

Thank you for that, Bill. We appreciate all of your thoughts. Hopefully, we can continue to stay the course and build on the relationship.

Bill Chen, Analyst

Yes. Yes. I'm not going anywhere, guys. I'm not going anywhere. You guys will have to deal with me for a long time.

David deVilliers, President and Vice Chairman

That's a great problem for us to have.

Bill Chen, Analyst

I mean, it creates a minor problem that I won't sell anything, so there's no liquidity in the stock.

David deVilliers, President and Vice Chairman

Appreciate all your loyalty and your support, your candor, we really do.

Bill Chen, Analyst

Yes. I appreciate everything you guys do, and that's all the questions and comments I have.

Operator, Operator

We will take our next question from Bill Ratner, private investor.

Unidentified Analyst, Analyst

I was just wondering if you could flesh out a bit the cash balance, how much of that is earmarked for capital versus what is essentially freely available for things like share repurchases and other discretionary types of investments?

John Baker, CFO

I believe we have around $80 million allocated for capital expenditures in 2024. We want to maintain a solid capital cushion, and we have plans that extend beyond 2025. The stock price will influence how much we can do in terms of share repurchases. However, for any significant share repurchase program, the majority of our capital will be focused on developing assets rather than on buying back shares. We may make small opportunistic purchases if the opportunity arises, but those amounts will be minor compared to our development investments.

Unidentified Analyst, Analyst

And then with respect to the aggregates assets, you said that you don't factor in the second life value into your NAV analysis. If you were to include that second life value, can you provide any parameters around what you think an appropriate second-life valuation would be for your assets?

John Baker, CFO

Bill, I think that's very uncertain considering the timeline of those events. The two places that come to mind are Fort Myers and Lake Lisa as well. We're still quite distant from Fort Myers and Lake Lisa. Yes, I believe that it would just be an unrealistic number. It's basically raw land, and when it comes to entitlements, zoning, and permitting, if I were to provide you with a figure, it wouldn't be grounded in reality. Therefore, we prefer not to make any guesses.

Unidentified Analyst, Analyst

Is your comment around entitlements, perhaps suggesting that there might not be as much land value as investors might think because the entitlement process, the costs involved would be pretty significant relative to the second-line value? Or is it just more that it's so far out in the future that it doesn't want to make a call?

John Baker, CFO

Yes.

Unidentified Analyst, Analyst

Okay. And then one last question. Going back to the previous questioner. So this Martin Marietta transaction seemed like a very high multiple. And if you look at Martin Marietta stock and stocks of comparable companies, these companies are trading at very high valuations. You guys are clearly very opportunistic investors. Can you just comment on why you would continue to own these assets as opposed to monetizing them and what appears to be a pretty robust environment for these types of assets?

John Baker, CFO

That's an interesting question. When you consider how they have increased prices and the rapid growth of our income stream, despite the attractive valuations, we believe they will surpass current expectations. Additionally, applying an EBITDA multiple to the royalty stream might not be the right approach. I'm uncertain about Vulcan, Martin, or our other tenants' willingness to invest more into reserves they already control. Everyone seems content with the current situation, and we certainly are too. From an after-tax viewpoint, while a $300 million transaction could provide liquidity, simply selling the asset and incurring taxes wouldn’t be the best way to utilize the cash generated from these assets. They are highly valuable, bringing in $10 million a year without debt, which serves as a strong cash flow source for further development. We’re very satisfied with this income stream as it stands, but if someone is willing to pay those high valuations, we are open to discussions.

Unidentified Analyst, Analyst

It seems to me that you don't know until you hire a banker and go through the process. In an environment like 12 to 24 months ago, the chances of finding a strong bid might not have existed, but from my perspective, the market appears to have changed. However, to your point, they already control the assets. So what's the point? You never really know until you engage a banker.

John Baker, CFO

Absolutely. We would likely be aware of any interest from Martin and Vulcan regarding the purchase of those assets due to our relationship with them. For instance, we successfully acquired the Blandford property because of our connection with Vulcan, who preferred not to invest in reserves they already owned. You are right that if you don't ask, you won't receive, but I believe that if they had any intention to buy, we would definitely hear about it.

Unidentified Analyst, Analyst

Got you. Well, thank you explanations, it's very helpful. Appreciate it.

John Baker, CFO

Yes, absolutely, Bill. To quickly follow up on that, for the past 10 years, valuations on an EBITDA basis have been historically high in the aggregates sector. Two years ago, we could have considered selling since Vulcan was trading at 20x, but that would have meant missing out on significant growth in our royalty stream. We have a strong belief in the aggregates industry; it’s part of who we are. Unless something drastically changes, we plan to continue using that cash flow stream, Bill, to support our development.

Operator, Operator

It appears that we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.

John Baker, CFO

Before we go, I just want to congratulate David deVilliers, Jr. on his election to the Board of Directors yesterday as its Vice Chairman. David has given his professional life to this company. He is the backbone of what this company has become and it's a well-deserved honor. So I just want to congratulate him. And I want to thank you all. We appreciate your continued investment and interest in the company, and I really appreciate all the questions you had. So thank you, and that concludes this call.

Operator, Operator

This does conclude today's program. Thank you for your participation; you may disconnect at any time.