Earnings Call Transcript - FRPH Q3 2022

Operator, Operator

Good day, everyone, and welcome to the FRP Holdings Third Quarter Earnings Conference Call. Please note this call is being recorded, and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to John Baker, II, CEO and Chairman of FRP Holdings. Please go ahead.

John Baker II, CEO

Good afternoon and thanks for joining us today. I'm John Baker, Chairman and CEO of FRP, and with me today are David deVilliers, Jr., our President; John Baker III, our CFO; John Milton, our General Counsel; David deVilliers III, our Executive Vice President; and John Klopfenstein, our Chief Accounting Officer. Before I begin, let me remind you that investors are cautioned that any statements made 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 include risks listed from time to time in our SEC filings, including, but not limited to, our annual and quarterly reports. We have no obligation to revise or update any forward-looking statements other than as imposed by law as a result of future events or new information. Listeners are cautioned not to place undue reliance on such forward-looking statements. This week we issued two press releases. One, our quarterly results for the period ending September 30, 2022, and another announcing an agreement with Steuart Investment Company and MRP Realty. The first press release contained our quarterly results and outlook, which were very encouraging. Revenues for the quarter were USD9.294 million, up 9.7% from the same period last year. Net income was USD480,000, up 36% from a year ago, with increased rents and lower amortization charges moving the needle. Net operating income, which is our main internal barometer of success, was USD17.970 million in the 9 months ended in September, up 32% year over year. David deVilliers will walk you through our operations in more detail in a moment. The second press release announced an agreement with Steuart Investment Company, our longtime partner MRP, and ourselves to combine our various properties in the Capitol Riverfront and Buzzard Point section of Southeastern Washington into a joint venture. These 10 properties, 3 of which include Dock 79, The Maren, and our newly completed project Verge which just began leasing. These projects are owned by MRP and ourselves. There are 3 undeveloped properties owned entirely by FRP, Phases 3 and 4 Riverfront and the Vulcan ready-mix plant in Buzzard Point. The final 4 are Steuart-owned parcels in Buzzard Point. As we develop new projects, FRP and MRP will control the design, development, and financing of the projects, with FRP owning at least 40% of each and MRP 20%. Steuart will have the right to retain 10% to 35% of the ownership of their properties and the right to buy 10% to 20% of FRP and MRP's properties. The Steuart properties are scheduled to be developed 1 every 4 years through 2035. The MRP-FRP properties can be developed whenever we choose. The first deal will include our purchase of Steuart Phase 1 and Steuart's purchase of 20% of our Maren and Dock 79 projects. The bottom line is that these 10 properties will have 3,000 apartments in 3 million square feet of mixed-use developments, all of which are contingent, except for some rights of way, and which comprise the entire southern entrance to the nation's capital. FRP, in conjunction with MRP, will have control of when and if these are developed, how they are developed, and how they're operated. This is one of the hottest apartment markets in the U.S. And by having control, we can ensure they are timed to maximize rents and absorption. We can control the design and quality of the projects, which will give this neighborhood a uniformly high level of beauty and quality that will ensure its reputation. By having MRP and Steuart co-invest in these projects, we've retained the predominance of control. And to the extent they invest, we've reduced the capital required by FRP. Our people, especially David deVilliers III, working with Arnold & Porter, our attorneys, have crafted a deal that is fair to all and which carefully outlines the rights of the parties. In short, we all know where we stand, and we are all excited about it. This will transform FRP in a carefully controlled process over 2 to 3 decades. We believe it's truly a deal made in heaven. Now, if I could, let me ask our President, David deVilliers, to walk you through our ongoing projects.

David deVilliers, Jr., President

Thank you, John, and good day to those on the call this afternoon. Relative to our in-house industrial platform, or Asset Management, net operating income for our in-house operations was USD693,000 for Q3 of '22 versus USD486,000 in the same period last year, an increase of 48.1%. The second of our 2 spec buildings at Hollander Business Park completed at the end of 2021 and collectively totaling 145,500 square feet became fully leased in the third quarter. We expect full occupancy in the first quarter of 2023. Supply chain issues notwithstanding, the 101,750 square foot build-to-suit warehouse building that will cap off the final building at Hollander Business Park should also be ready for its tenant to occupy in the first quarter of 2023. Cranberry Run Business Park, our renovated 268,000 square-foot multi-building warehouse park in Aberdeen, Maryland became fully occupied in the first quarter of 2022. This park remains 100% occupied and is performing ahead of original projections. On the predevelopment front, we have 3 projects in the queue. This past quarter, we completed the annexation process of the 55-acre tract in Harford County, Maryland, purchased in 2020. Building designed to create up to 675,000 square feet of warehouse product will follow 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 in 2024. We are also knee-deep into the permitting process 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 Q2 2023. Finally, during this quarter, we completed the purchase of 170 acres of industrial land in northeast, Cecil County, Maryland. This plot of ground will hold a 900,000 square foot distribution warehouse. Initial predevelopment entitlements have begun and assuming favorable market conditions, we expect to construct this building in '24 or '25. On completion of these 3 aforementioned land development projects, plus the build-to-suit warehouse due to be delivered shortly at Hollander, we'll add 1.8 million square feet of additional warehouse product to our industrial platform that when added to the assets in operation at Hollander Business Park and Cranberry will total over 2.2 million square feet. As we look toward 2023, the increased occupancy at the new buildings at Hollander and the fully occupied Cranberry Run Business Park should provide a healthy lift to our NOI. In our Mining and Royalty business segment, as John mentioned in his opening remarks, our Mining and Royalty division saw revenues for the quarter of USD2.471 million versus USD2.250 million in the same period last year. Net operating income was USD2.336 million, an increase of 10.34% 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. Currently, we maintain both stabilized and projects under development with 3 distinct development partners, MRP Realty, Woodfield Development, and St. Johns Properties. As of 9/30/22, our joint venture platform includes 7 mixed-use and 1 office retail project in various stages of development and operation. 4 projects are located in D.C. where MRP is our joint venture partner. These projects are Dock 79, Maren, Bryant Street Phase 1, and Verge. Leasing is underway at Verge, and we welcomed its first tenant this month. Verge was 97% complete at quarter's end. Dock 79 and Maren maintained better than 95% occupancies for the quarter, and the last retail suite at Dock 79 and 45% of the 8,500 square feet at Verge became leased during the quarter. Our transit-oriented mixed-use project just north of Union Station in D.C., Bryant Street Phase 1 saw its residential occupancy increase to 86.7% and retail occupancy was 71.4% as of September 30. Our 2 mixed-use projects in Greenville, South Carolina, with Woodfield as our development partner, saw excellent progress. Riverside, with 200 apartments, was 1 year old in August, and the project was 92% occupied as of the end of the third quarter. Riverside also became a stabilized asset in the third quarter, defined as more than 90% occupied for more than 90 days. 408 Jackson's 227 apartments will be placed in service before the end of the year and were 98.6% complete at quarter's end. This 4,539 square feet of retail is 100% pre-leased. Few additional projects that make up the balance of our current third-party JV platform are Hickory Creek, our DST or Delaware Statutory Trust in Richmond, Virginia, and an office retail project in Baltimore, Maryland with St. Johns Properties. Hickory Creek's 294 apartment units remained above 95% occupancy for the third quarter, while our JV with St. Johns, that includes 72,080 square feet of single-story office and 27,950 square feet of retail, remains 48% leased and occupied at quarter's end. As of September 30, 5 projects, including Dock 79, Maren, Verge, Riverside, and Bryant Street, totaled 1,600 apartments in operation, which represents a 47% increase over the third quarter last year when we had 1,085 apartments in operation. The remaining 227 apartments and retail spaces currently under construction will be completed and ready for occupancy by the end of this year. FRP's share of the net operating income for these 5 projects was USD3.315 million for the third quarter of 2022 versus USD1.931 million in the third quarter of 2021, a 72% increase. So to summarize, relative to our current third-party joint ventures and mixed-use developments, Hickory Creek and Windlass notwithstanding, we are currently invested in 6 mixed-use multifamily retail projects, totaling 1,827 apartments and 126,000 square feet of retail. Finally, as a postscript to our third-party joint venture program, and as some additional commentary on John's opening remarks, with our newly penned agreement with the Steuart Investment Company and our existing partners of 10-plus years, MRP Realty, we have a generational opportunity to create a unique waterfront destination among multiple projects, all controlled by a single ownership group with the freedom to pursue alternate development plans that individual developments cannot consider. The new partnership will add some 2,000 apartments and approximately 2 million square feet of mixed-use development to the existing 913 apartments and 900,000 square feet we already have in Southeast Washington. Together, the parcels represent over 0.25 miles of uninterrupted waterfront along the Anacostia River at the southern entrance to our nation's capital. Predevelopment activities on Phase 1 conceptually planned for 400-plus apartments and 10,000 square feet of retail located on 1 of the 4 parcels that Steuart brings to the venture have commenced, and we anticipate a shovel-ready project sometime in 2023. In our lending ventures, our current lending venture project, Amber Ridge and PG County, Maryland is winding down. The total commitment to this project is USD18.5 million. The investment includes a charged interest rate and a minimum preferred return of 20%, above which a profit-induced waterfall determines the final split of proceeds. As of September 30, the horizontal development was complete. 124 of the total 187 lots, all of which are under contract of sale to national homebuilders have been taken down, with USD15.5 million inclusive of interest returned to FRP as of 9/30/22. In March of 2020 when the world shut down, FRP maintained a portfolio of 500,000 square feet of operating industrial, office, and retail space and 599 apartments. As of September of 2022, FRP had 660,000 square feet of operating industrial office and retail space and 1,894 operating apartment units with an additional 227 apartments and 101,000 square feet of industrial due to be delivered in the next 90 days. This does not speak to our additional development pipeline which is formidable in the industrial and mixed-use residential categories. This is a period of tremendous growth for FRP and it is a story we are eager and proud to share. None of this growth or breadth of opportunity would be possible without the solid financial foundation that separates us from much of the competition, enabling us to both capitalize on great projects and sometimes make hard decisions not to. Thank you. And I'll now turn it back to John.

John Baker II, CEO

Thank you, David. Let's now open it up for questions if we might.

Operator, Operator

Our first question comes from Emerito Quintana of Numantia.

Emerito Quintana, Analyst

Can you hear me?

John Baker II, CEO

Yes, we can.

Emerito Quintana, Analyst

My name is Emerito Quintana, and I'm calling from Spain because our fund owns 1% of the shares of FRP Holdings, and I hope it will remain so for a long time. I would like to know how do you see the mining business in 10 years? What is your estimate of the growth of the price per ton of aggregates in the long term? And in the Florida quarries, how do you expect natural disasters such as hurricanes to affect the business in the long term?

John Baker II, CEO

Emerito, it's nice to meet you, and we're proud to have you as a shareholder. The quarry business in Florida, of course, I have no idea what's going to happen over 10 years. But what we have seen is 2 things. One, the aggregates business throughout the United States has been growing well in excess of inflation, even in today's high inflationary times at Vulcan, and Martin Marietta reported, I think, an 11% or 12% increase in pricing this last quarter. It's an amazing time for that. With mortgage rates rising, you would expect the homebuilding segment of their business to slow down dramatically. And that, of course, could affect the pricing and certainly the growth of that business. But it's my belief that because rock is simply running out in Florida, it's hard to permit in Georgia and Virginia, that we will continue to see pricing escalate at greater-than-inflationary rates for a period of maybe up to 10 years, certainly for the next 5 years.

Emerito Quintana, Analyst

Okay. And the last one. I know you guys want to take advantage of the stock when you can and be strategic with buybacks. But how do you see the expected return of a potential buyback now?

John Baker II, CEO

Okay. We are carefully plotting the usage that we have going forward. And our preference is to invest in projects rather than to invest in our stock unless it just happens to be very low. And so especially with the Steuart joint venture, we will be very careful about buying stock in because we've got the need for that money going forward over the next 10 years. And so while I would never say we wouldn't buy it, we will if tempted too badly. But I think the prudent thing for us is to keep a good bit of cash available for future projects.

Operator, Operator

We'll take our next question from Curtis Jensen of Robotti & Company.

Curtis Jensen, Analyst

Can you hear me okay?

John Baker II, CEO

Yes, sir.

Curtis Jensen, Analyst

What stands out to me about the Steuart announcement is that you suddenly have control over a significant amount of property, enabling the potential to develop a master-planned community at Buzzard Point. This would allow for architectural and resource connections between the buildings, which is quite intriguing. Is that dynamic in play? Additionally, you mentioned it earlier, but I'm curious if these projects will progress sequentially or simultaneously, with multiple projects underway at once, or if it will depend on the environment. That's my first question.

David deVilliers, Jr., President

Well, I'll take a run at the first part, Curtis. It's David deVilliers. Obviously, this is an exciting program really for all of us. The thing that we really like about it, it's a little bit like what you just articulated. We can create a master plan community there. And like I think I said in my remarks is that we have the ability to do things that individuals can't do. We can move properties around. We can come up with different types of development plans. We can combine lots. We can do all sorts of things because of the size and scope of this project. So yes, for all intents and purposes, it's a clean slate, and we can pretty much do whatever appropriate urban design that we come up with. We'll certainly have a lot of input from the Zoning Commission and the Office of Planning, but they're pretty excited about dealing with one set of owners as well. Relative to how they get developed, I think the market will dictate that action and just the logistics of development projects in different locations. For example, sometimes you want to build away from the water and then go towards it. But with the way we're going to design the program, we don't want to be having concrete trucks or something driving by any more buildings than we have to. So we control the development program for all intents and purposes. We do have a requirement to buy some of Steuart's properties, as John articulated, over 10 years. But the other ones we pretty much determine when we want to do them. Theoretically, you could be doing two projects at once. The market's going to dictate those actions as much as anything.

Curtis Jensen, Analyst

What happens in terms of someone experiencing a technical difficulty, or do you have it set that the valuation is subject to a third-party appraisal on how that works?

David deVilliers, Jr., President

I think you were asking how we determine the value of the projects and the land.

Curtis Jensen, Analyst

Is it a third-party appraisal type of thing?

David deVilliers, Jr., President

Yes. We will conduct an appraisal process for all properties once they are shovel-ready, not before. When these projects are ready, we can get them appraised—specifically, the FRP-MRP would handle their own appraisal, while in the case of Steuart, the MRP-FRP team will manage that appraisal, and Steuart will do the same for theirs. If our valuations don’t align within a certain percentage, we will obtain a third appraisal. This is an arm's length program, and the properties will only be appraised once they are shovel-ready. Additionally, any environmental issues present will be accounted for in the appraisal process, ensuring the evaluation is for a clean parcel.

Curtis Jensen, Analyst

Okay. And then I'll wrap up here in a second. But I guess the specter of higher construction costs, higher borrowing costs has imposed some discipline on probably everybody. But I'm curious about with respect to Steuart whether you feel like you guys are getting married right now and probably for a pretty long time. Do you have a good philosophical alignment in terms of your outlook and how your approach is to life?

David deVilliers, Jr., President

I think we do, as good as you can with three different groups, but we all have the same endgame. We all are investing a pretty sizable amount of dollars into these projects. And what really determines the go forward is having a shovel-ready project that makes economic sense. We have to do all the design. We have to get a guaranteed maximum price from the general contractor. We have to get appropriate and acceptable financing. And obviously, the market would have to dictate that the cost of these projects would give us the appropriate return on cost. So I think our interests are definitely aligned in that regard.

Curtis Jensen, Analyst

But can you talk about or share what you think is first up in the queue?

David deVilliers, Jr., President

Well, as I said in my opening remarks, we are partially through the predevelopment process on the first phase of this venture, which is on Steuart's property, on one of the four phases of Steuart. And it's about 400-plus apartments, and I believe about 10,000 square feet of retail, then we're going through, I guess, the song and dance with the Office of Planning and ultimately the Zoning Commission. And so once we get approvals and the appropriate entitlements there, then we would move forward with the drawings and then off to the guaranteed maximum price, and then see what kind of financing is out there and what the market will dictate, and decide at that time whether we want to go forward or just sit back and wait.

Curtis Jensen, Analyst

Keep up the good work, guys.

Operator, Operator

We'll take our next question from John Koller of Oppenheimer & Close.

John Koller, Analyst

My questions really are going to revolve around the pace at which you'll be developing and how you're thinking about capital allocation between what I consider a large number of balls in the air, so between the industrial, the next phase of Bryant Street, and now the new joint venture. And then that raises the question of what capital might you require? I know buybacks are probably not in the cards, which is fine. But it seems to me like you might actually need to raise capital depending on the pace at which you develop these. And I'm curious if you've considered that at all and how you think about that if it's necessary.

John Baker II, CEO

David, you want to take a crack at that?

David deVilliers, Jr., President

Yes. Obviously, one of the things that we like about this program, at least with Steuart, and then I'll get back on the other ones, is that having these other partnerships, with the other partners, it reduces the amount of equity that FRP would be putting into these projects. For example, when we did Dock 79, we started off at about 77% of the ownership and then at Maren, it was 80%. And so now we're going to be at 40%, so the equity that is required is going to be less. It's still substantial, but obviously, it's going to be less. Another example would be Bryant Street, which is not in this part but in a different submarket, we have 61% of the ownership there. So one thing about the capital requirement, obviously, is that we will be putting up less money in equity. We do have an opportunity, if we so desire to add more because there might be a shortfall of anywhere from 10% to 15% of the equity. But going back to the question of how many balls you have up in the air. We are very conscious as to how our capital is utilized. And we want to make sure that there's enough dry powder in the bank to stand off pretty much anything that comes up. So we're pretty darn conservative as it relates to how much money that we have invested at any one time. As an example, one of the interesting programs that came about as a result of this is this first phase of Steuart; they purchased 20% of our ownership in Dock and Maren. So we're using those proceeds, which is about USD20 million, and then some proceeds from another sale that came up to us after the third quarter to invest in that Steuart Phase 1. So the Board, in conjunction with ourselves, like and probably more so, the Board has created a set of rails that we're going to have to stay inside of. And if we get outside of that, we have to either delay projects or maybe even sell something in order to come up with the additional capital.

John Koller, Analyst

Is it fair to assume that this will be the primary focus? I would expect that Bryant Street and the new joint venture will take up most of your time once you have the industrial space secured. Do you think you will still pursue development opportunities in industrial, or will that become less of a focus?

David deVilliers, Jr., President

We have been quite successful in our industrial program, which significantly contributed to our current position after selling several apartments and industrial projects in 2018, providing us with the initial funding to explore new directions. We remain active in industrial real estate, as all our existing buildings, including one currently under construction, are fully leased and expected to be occupied in the first quarter of 2023. We have three industrial development projects in progress, and our approach is to evaluate the market and our capital once they are shovel-ready. We will then determine whether to proceed, pause, or seek a partner. For instance, we may consider partnering for large warehouses of 675,000 square feet or 900,000 square feet, but it's crucial for us to maintain an appropriate debt-to-equity ratio, which our Board prioritizes. Therefore, we are careful about managing our cash reserves.

John Koller, Analyst

Okay. And then just really quick. The last one I have, I guess, is on Bryant Street. You're reaching a point where you may get stabilization soon; hopefully, very soon. And I'm curious what the timeline is for the next phase and how large that might be. I know you only developed a small portion of it.

David deVilliers, Jr., President

It's an interesting situation. We still have some progress to make before we feel confident moving into the next phase. This program is focused on transit, and the transit aspect has been impacted by COVID, leaving everyone working to recover. We want to ensure that retail operations are fully functional. Currently, we have 71% leased and occupied space, and our goal is to increase that to 90%. The three residential buildings are about 80% occupied, indicating we are moving in the right direction, but we need more time before we can comfortably proceed with either Phase 2 or Phase 3. For Phase 2, the preliminary plans suggest building around 200 apartments attached to a property that we do not currently own, but we have an option to buy the remaining land that would complete the project. We aren't under pressure to purchase that property immediately since the owner is one of our partners. We can choose the right timing for Phase 2, which will depend on how we allocate our capital and manage our spending.

John Koller, Analyst

Okay. And then, this is the last question, I promise. Are you under any timelines being in the Opportunity Zone where you have to get something additional completed? Or is that a requirement?

David deVilliers, Jr., President

No, we're finished with that. We just need to pay taxes in '27 and hold it until '29. That's really all we need to do.

Operator, Operator

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

Bill Chen, Analyst

Can you guys hear me?

John Baker II, CEO

Yes, sir.

Bill Chen, Analyst

I'm driving on the highway, so I haven't had a chance to digest the press release. My main question is about the cash on the balance sheet, which I believe is mostly in Treasuries. Can you provide the breakdown of the maturity dates on that? Given that rates have increased significantly since the last time, can we take the mature amounts and reinvest a portion, like one-quarter or one-half, in instruments with maturities of less than 12 months? Could you provide some insight on that?

John Klopfenstein, Chief Accounting Officer

Bill, it's John Klopfenstein here. So we've got all the cash invested in Treasuries, as you said, the vast majority of it is in 6-month Treasuries, and we've got some that are coming mature every week or two. So just this week, we've invested at 4.6% for 6 months. So that's our go-forward plan.

Bill Chen, Analyst

That's great to hear. I thought I read in the disclosure that you have some duration that extends up to 2 years. Can you share how much of it is longer than 1 year?

John Klopfenstein, Chief Accounting Officer

We initially invested USD48 million in 2-year Treasuries, which are set to mature at the end of 2023. The rest consists of 6-month Treasuries maturing approximately every two weeks.

Operator, Operator

And at this time, it appears we have no further questions in queue. I will now turn the floor back over to Mr. Baker for any additional or closing remarks.

John Baker II, CEO

Thank you all for joining us. I truly believe this is a significant moment in our company's development, one that will enable us to create substantial value by undertaking projects at a measured and well-scheduled pace in this promising market for many years to come. I want to mention that while it may seem like we have a lot happening, we are very careful in planning the timing and phases of these projects, whether they are industrial or mixed-use. We feel confident in our capability to manage this over the long term without needing to raise funds or, more importantly, get into financial difficulties. We are aware that the world can change rapidly, and we want to ensure we have adequate cash reserves to adapt, especially if changes occur negatively. While we are excited about the growth potential of our company over the next decade or so, we are committed to not rushing into decisions that could jeopardize our finances. That is our top priority. I appreciate your interest and believe we are in for a great journey. I look forward to speaking with you next quarter.

Operator, Operator

This concludes today's conference call. We thank you for your participation. You may disconnect at any time.