FRP - Q1 2023

Transcript

Operator (participant)

Good day, everyone, and welcome to today's earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing the star and one keys on your touch-tone phone. Please note this call may be recorded. It is now my pleasure to turn today's program over to John Baker III. Sir, please begin.

John Baker III (CFO and Treasurer)

Good morning. I'm John Baker III, Chief Financial Officer and Treasurer of FRP Holdings. With me today are David deVilliers, Jr., our President, John Baker II, our Chairman and CEO, John Milton, our Executive Vice President and General Counsel, John Klopfenstein, 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 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 GAAP to Net Operating Income. Excuse me, to reconcile GAAP to net income, please refer to the segment titled Non-GAAP Financial Measures on pages nine and 10 of our most recent earnings release. Now for our financial highlights from the fourth quarter.

Net income for the first quarter was $565,000 or $0.06 per share versus $672,000 or $0.07 per share in the same period last year. Net income for the first quarter compared to the previous year was impacted primarily by an increase of $2,021,000 in equity and loss of joint venture from two projects in lease-up, as well as a $733,000 gain last year from the sale of excess property in Brooksville, Florida. First quarter pro rata NOI for all segments was $6,990,000 versus $5.18 million in the same period last year for an increase of 34.9%.

David will touch on operations with greater depth and detail in his remarks, but I will briefly mention a few operational highlights. Asset management increased revenues by 27.5% and NOI by 60.6% compared to the first quarter last year. Total revenues in the Mining Revenue segment increased 35.3% compared to the first quarter last year, and NOI in the first quarter of this year increased 37% over Q1 2022. For the second quarter in a row, mining royalties experienced its highest revenue total ever for any quarter. This is the first quarter the segment has cleared $3 million in revenue and the first time it has surpassed $11 million in revenue in any trailing 12-month period. If I could turn things over to David deVilliers Jr. to walk you through our segments in more detail.

David?

David deVilliers Jr. (President)

Thank you, John. Good morning to those on the call. As I've done for the past few quarters, I'd like to provide you with a slightly different perspective on the results of the company from an operational standpoint. We report our business segments in designated silos, which are important in analyzing the company. However, operationally, we have overlap and synergies that are difficult to follow using the business segments as reported. Departing from GAAP and employing a day-to-day look at FRP, let me offer the following. The company's approach is four-pronged, and this has been the core of our business since mid-2018 when we liquidated our legacy warehouse portfolio. First, in-house asset management includes our industrial, commercial, and land development platform. These properties are developed, managed, and owned 100% by FRP. Of course, there's the mining and royalties.

Three is the third party joint ventures, which is the name implies are projects developed in conjunction with third parties, where FRP is the major owner, but relies on seasoned and respected third party operating partners to perform the lion's share of entitlements, construction, and day-to-day operations. Our last segment, lending ventures, where we are the principal capital source for residential land development activities. Relative to our in-house industrial platform for asset management, delivery and occupancy at our three buildings at Hollister Business Park, as well as rent growth on renewals at Cranberry, have produced a healthy lift to more than double the NOI for this period last year with Q1 2023 NOI of $891,550 over Q1 2022 NOI of only $308,777.

As of last month, our three buildings in Hollister, totaling 247,000 sq ft, are fully leased and occupied. Cranberry Run Business Park, our renovated 268,000 sq ft multi-tenanted building, warehouse park in Aberdeen, Maryland, remains fully occupied in the first quarter of 2023, capping off five straight quarters of full occupancy at this location. Our industrial pipeline is strong with three projects in the queue. We completed annexation on a 55 acre tract of land in Aberdeen adjacent to Cranberry Business Park, we'll soon begin building design to create up to 690,000 sq ft of warehouse product. Existing land leases for the storage of trailers on site help to offset our carrying and entitlement costs. We are hopeful we can be in construction there in 2025.

In northeast Maryland, along I-95 Corridor, we own 170 acres of industrial land that will ultimately support a 900,000 sq ft distribution center. Pending favorable market conditions, we expect to break ground as early as 2024. Finally, our 17-acre parcel in the Perryman industrial section of Harford County, Maryland, not too distant from our other assets in Aberdeen, is moving through the entitlement process. We expect a building permit to be issued shortly for a 259,000 sq ft warehouse. Depending on final market dynamics, construction on this project could begin as early as this summer. Completion of these three land development projects, plus the recently delivered warehouse at Hollister, will add over 1.9 million sq ft of additional warehouse product to our industrial platform.

When added to the assets already in operation at Hollister Business Park and Cranberry Run, will total over 2.35 million sq ft. Relative to our mining and royalty segment, our mining and royalty division saw total revenues for the quarter of $3,282,000 versus $2,425,000 in the same period last year. As John echoed in his opening remarks, this is record revenue for any quarter in the mining and royalty segment for the second quarter in a row. NOI was $3,148,000, an increase of 37% over the same period last year. Moving on to our third-party joint ventures. Currently, we operate from stabilized and development projects with three distinct partners, MRP, Woodfield, and St. John Properties.

The difference between development and stabilized as it relates to our business segments being an initial occupancy level of 90% for a minimum of 90 days. As of quarter end, our JV platform includes seven mixed-use projects totaling 1,827 apartments, 72,000 sq ft of one-story office, and 226,000 sq ft of retail, all of which have completed construction. Four projects are located in Washington, D.C., where MRP Realty is our joint venture partner. These include Dock 79, Marin, Bryant Phase One, and our most recent completion, Birch. In Washington, D.C., our neighboring projects, Dock 79 and Marin, where our partners include both MRP Realty and most recently Steuart Investment Company, remain healthy with occupancies of 93.4% and 93.2% respectively at quarter's end, with all retail fully leased.

Our newest project in the District, Birch, received its final certificate of occupancy in the first quarter and was 32% leased and 24% occupied, with nearly half or 45% of the retail spoken for at quarter's end. Our final D.C. project is Bryant Street, a multi-building transit-oriented mixed-use project located on the Red Line in northeast Washington, D.C. Bryant Street contains two residential projects, Chase and Coda, as well as a movie theater, anchor retail building, and a flexible outdoor use fully leased to a unique entertainment concept called Metrobar. At the end of the first quarter, Bryant Street's residential units were 90.8% occupied, and its retail components were 84.2% leased and 79% occupied.

A food hall, Bryant Street Market, which occupies about 10,000 sq ft, opened in March and has seen early success with its first four tenants, including a visit last week by the President and Vice President of the United States in celebration of Cinco de Mayo. Moving on to South Carolina. Our two projects in Greenville with Woodfield Development are seeing great success. Riverside, which sits on the Swamp Rabbit River Trail, a popular recreation corridor in Greenville, opened its 200 apartments for lease in August of 2021 and was 95% occupied as of the end of the first quarter. 408 Jackson, another mixed-use project, is located downtown and shares a street and plaza with Fluor Field, the stadium home of the Greenville Drive, which is an affiliate of the Boston Red Sox baseball team.

408 Jackson was placed in service during the fourth quarter of 2022, and as of quarter end, was 53% leased and 29% occupied, with its retail component fully leased and targeting opening by the fourth quarter this year. The last project that makes up our third party joint venture division is undertaken with St. John Properties, a pioneer in flex development and former national developer of the year. With St. John, we are developing Windlass Run, Middle River, Maryland. That includes 72,000 sq ft of single-story office and 7,950 sq ft of retail. This project continues to be 50.7% leased and 48% occupied.

To summarize, relative to our third-party joint ventures, FRP's 52% ownership share of the NOI for these seven projects was $2,868,573 for first quarter of 2023 versus $2,496,129 in the same quarter last year. That's a 14.9% increase. Lastly, our lending ventures segment. This last leg in our operating stool is a program where we provide working capital towards the entitlement, horizontal development, and future sale of single-family residential projects and ultimately sales to national homebuilders. The first of our two current projects is Amber Ridge in P.G. 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. As of the end of the quarter, 144 lots have been taken down, with the final 43 lots expected to be taken down by the end of this year. Our other current lending venture is called Presbyterian Homes, 344 lot, 110 acre residential development project in Ardingley, Maryland. We've committed $31.1 million in funding under similar terms to Amber Ridge. A national homebuilder is under contract to purchase all lots, which will include 222 townhomes and 122 single-family dwellings. Horizontal construction has begun. We expect the first lots to be taken down in Q4 of 2023.

In closing, we are very pleased the company has been able to continue to surpass itself in terms of earnings and adapt to difficult market conditions. We've flourished in a constantly changing environment, and we've been able to do so thanks to the strength of our balance sheet and the consistent efforts of our talented team. We look forward to building upon our successes and finding new ways to capitalize on our unique position in the marketplace. Back to you. I will turn it back to John.

John Baker III (CFO and Treasurer)

Thank you, David. At this point, we are happy to open it up to any questions you might have.

Operator (participant)

Thank you. At this time, if you would like to ask a question, please press the star and one keys on your touchtone phone. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one to ask a question, and we'll pause for a moment to allow questions to queue. At this time, there are no questions in the queue. We just had one pop up from Stephen Farrell with Oppenheimer. Your line is open.

Stephen Farrell (Investment Management Associate)

Good morning. How are you?

John Baker III (CFO and Treasurer)

Morning, Stephen.

David deVilliers Jr. (President)

Morning.

Stephen Farrell (Investment Management Associate)

I had just a few quick questions here. In New York City at least, we had a huge increase in apartment listings in March. We also saw a big increase in rents as well. Do you see a similar dynamic in D.C. as maybe people pushing back buying homes given sort of banking crisis and continuing to rent?

David deVilliers Jr. (President)

I can take a crack at that one. Basically, we have seen some pretty healthy increases in our rates both for renewals and also trade outs. As you can see, our occupancies have been pretty strong in the Washington, D.C. area and also in Greenville, South Carolina. Obviously homes have been with the interest rates going up the way they have, they're making some of these projects a little difficult as it relates to not only building them but selling them. It'll be interesting to see how it helps out the apartments.

John Baker III (CFO and Treasurer)

Stephen, I think that, you know, even when interest rates were low, it seemed like, you know, people in their late 20s and 30s were pushing off a home purchase just because, you know, because interest payments were low and house prices were so high, the down payment was, I think, hard for people to afford. Obviously, interest rates going up and home prices staying kind of where they were, it only exacerbates that. It seems like there's a total lack of supply in available houses, which we're hoping to capitalize on with our lending venture. I don't think rising interest rates are a boost to people buying homes.

Stephen Farrell (Investment Management Associate)

That's good. Thank you. You talked on the last call about sort of where rents were at The Verge versus the Marin, and it was running about 10% less. I know that kind of the Q4 is, you know, not the for seasonality, it's a bit slow there. Have you seen a pickup in rents there? Do you have an update?

David deVilliers Jr. (President)

As far as Marin goes, Marin is probably the highest, receiving the highest rent per square foot. We're also pretty well occupied there. Of course, that's on water. Verge is actually seeing some pretty strong leasing activity now that we're coming into the, you know, the strong leasing months. You know, obviously, our plan here is we've got a concrete plant next to us that's closing up operations by a third party, that's kind of helping, you know, helping reduce some of the traffic, not all of it. We're starting to see some pretty healthy tours and visits, and we're seeing the rents starting to pop up a little bit. We think that they'll continue that way.

I think it's gonna be certainly less at the end of the day than what you see at Dock and Marin because it's not on the water just like those two are. We are seeing the rents starting to jump.

Stephen Farrell (Investment Management Associate)

On the last call, you also mentioned, potentially starting the phase one of the Steuart partnership.

David deVilliers Jr. (President)

Uh-huh.

Stephen Farrell (Investment Management Associate)

In Q4. Do you have any kind of thoughts on starting that project in the current environment?

David deVilliers Jr. (President)

Obviously, there's some pretty strong headlines that say that that's not gonna happen. We're still going through the due diligence process, which includes getting the property ready for what we call shovel-ready for development. That, we'll probably be able to take a look at, you know, the appropriate modeling for that project sometime at the end of the third quarter or the beginning of the fourth quarter. I would say that probably just the timing and certainly all of the economic winds not necessarily being the greatest, that may get pushed off a quarter.

We're still kind of in the process of looking at that. We certainly don't wanna start a building too late in the fall, even if the market does dictate the right kind of actions, because it causes too much, you know, it causes too much in extra cost because of the weather and that kind of thing to get started too late in the year. I would say it probably would be closer to the first quarter or maybe even second quarter of 2024. Hard to tell at this point. More news after the next quarter.

John Baker III (CFO and Treasurer)

Yeah. Stephen, I don't know if you kind of remember the optionality of the, of the deal we have with the Steuart, but it can either go one of four ways. The first is the best possible way, which is we do our due diligence, we do our planning and entitlement, and then everybody wants to move ahead. We pay the Steuart for the land, and then they reinvest that money into the project, and we're all good to go. The second option is we wanna go, and they don't. In that case, they're obligated to sell us the land, and we go out and do it ourselves. Third option is we don't wanna move forward, and they do.

In that case, they pay us back for our due diligence and planning efforts, and they go on their way. The fourth option is we don't like, you know, the way the market's looking at the, you know, the time that we need to make a decision, and we all just sit tight. I think, you know, we're somewhere between the first option and the fourth option. If interest rates look like they're gonna stay flat or go down, we'll probably feel a lot better about it. Construction costs go down, we'll probably feel a lot better about it. If everything stays really expensive, I think we'll probably sit tight because this is a gigantic building, over 400 units.

It's closer to The Verge, in terms of rents than it is to Marin, just by virtue of its location. We're not just gonna, you know, flip a coin and say, "Hope it works out." You know, this is a, this is a big deal, and this is the first step in a really important partnership, and we want it to be successful, and we're gonna give it every opportunity it can to succeed.

Stephen Farrell (Investment Management Associate)

That's a good call. Thank you. I guess if no one else is on, I'll keep going here. With the moratorium in Harford County, do you think this will affect future developments? Will there be more restrictions on industrial in and around Baltimore moving forward?

David deVilliers Jr. (President)

Well, right now, it was a bit of a surprise to everyone when the county executive came in and placed a moratorium on all industrial development for 180 days. As it started to work its way through the commission, it's reduced it to somewhat. For example, we're grandfathered because our project, that's the 259,000 sq ft building that I mentioned in my opening remarks, we had already received what they call site plan approval, so that was grandfathered in. We're allowed to go forward, and as I said, we're looking to get a building permit here shortly. Market conditions, we're doing market studies now to see how things are. Vacancy right now is very low in this part of the world.

We're still taking a look at it. The moratorium is for 90 days with the ability to extend it for another 90. I just think that everyone's trying to figure out with these big buildings, you know, what properties should be zoned industrial and what should, what properties might not be, and that's what they're going through. I think we'll find out some more, but we like the idea of the fact that we're not gonna have a whole lot of competition because we're the last one to get a new permit.

John Baker III (CFO and Treasurer)

David, none of our other properties in our pipeline are in that county. It won't be an issue with those at least as things currently stand.

David deVilliers Jr. (President)

That's pretty much correct.

John Baker III (CFO and Treasurer)

Yeah.

Stephen Farrell (Investment Management Associate)

Well, you had the one, the $259,000, which is fine, but isn't there, one other, the 54 acres? Would that be subject to it?

David deVilliers Jr. (President)

That's the Krauss property. That's been annexed into the town of Aberdeen, which separates that out from the other projects. We're not part of that moratorium at this point. Again, that property, as I've stated, we're really not ready to move forward on that property and for probably at least another year. We've spent a lot of time annexing it. Part of the property was in the town of Aberdeen, part of it was out. We annexed the entire parcel, that kind of puts us in a better position as it relates to the improvement process. We still have a ways to go to get the entitlements done on that property. We really weren't even planning regardless of this "moratorium" to starting anything there, probably until 2025.

The good thing about that property is we lease a lot of it out for trailer storage, which gives us a pretty healthy return, you know, on our initial investment while we're waiting.

Stephen Farrell (Investment Management Associate)

Just the last question. Do you have an updated figure and just ballpark a dollar value on what you'll spend for development activities for the rest of 2023?

John Baker III (CFO and Treasurer)

I think the projected CapEx number that we have in our 10-Q is $83 million.

Operator (participant)

All right. Thank you. As a reminder, that is star one to enter the queue. All right. We have no further questions at this time.

John Baker III (CFO and Treasurer)

All right. I wanna thank everybody for their interest in the company, and we're gonna get back to work and keep building shareholder value. Thank you.

Operator (participant)

Thank you, ladies and gentlemen. This does conclude today's call, and we appreciate your participation. You may disconnect at any time.