FRP - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 was mixed: Net income fell 72% to $0.58M ($0.03 EPS) on elevated legal/due diligence costs and lower investment income, while pro rata NOI rose 5% YoY to $9.69M on stronger mining royalties and stable multifamily performance.
• Segment divergence: Mining Royalty Lands NOI +21% YoY to $3.67M; Industrial & Commercial NOI −15% YoY to $1.01M due to an eviction, lease expirations, and the new Chelsea warehouse operating while vacant.
• Strategic moves: FRPH entered a $50M five‑year revolving credit facility at Daily Simple SOFR + 2.25% with a 0.35% unused commitment fee and formed a JV to develop 377,892 sf of industrial in Lake County, FL (95% FRPH interest), reinforcing the shift toward industrial growth.
• Outlook: Management continues to guide to flat 2025 NOI vs 2024 given Q3 2024’s nonrepeatable mining minimum payment and near‑term industrial vacancies; leasing Chelsea and Cranberry at higher rates (“sevens or greater”) is the near‑term catalyst for NOI inflection.

What Went Well and What Went Wrong

What Went Well

• Mining royalties accelerated: Segment NOI +21% YoY to $3.67M, with higher revenue per ton (+7% ex prior year overpayment) and favorable unrealized revenue normalization; “royalty revenues…were impacted by the prior year overpayment deduction” and benefited this year.
• Multifamily resilience: Pro rata NOI +1% YoY to $4.74M on improved occupancy at The Verge; consolidated Dock 79/Maren operating profit before G&A rose 3% on lower depreciation.
• Strategic financing and pipeline expansion: New $50M revolver (SOFR + 2.25%, 0.35% commitment fee) and a 377,892 sf Lake County, FL JV (95% FRPH) with options to expand to ~1.0M sf; “supports our shift…toward our industrial business segment…on track to deliver three new industrial assets every two years”.

What Went Wrong

• Legal/due diligence expense spike: Operating profit −$1.16M YoY, including $712k legal costs tied to a potential investment and higher G&A from succession/transition overlap; net investment income −$1.36M YoY on lower rates and fewer lending venture lot sales.
• Industrial softness: NOI −15% YoY to $1.01M and occupancy down (50.3% including Chelsea; ex‑Chelsea 74.0% vs 95.6% last year) due to an eviction and lease expirations; depreciation/operating costs from the new but vacant Chelsea facility weighed on results.
• Lower cash yield: Earnings on cash equivalents decline (−$456k YoY) pressured net investment income amid rate backdrop; management anticipates flat 2025 NOI as vacancies are addressed and prior one‑time mining tailwinds fade in H2.

Transcript

Speaker 0

Good morning and welcome everyone on the call. I'm Matt McNulty, Chief Financial Officer of FRP Holdings, Inc. and with me today are John Baker III, our CEO, John Baker II, our Chairman, David deVilliers III, our Chief Operating Officer, David deVilliers Jr., our Vice Chairman, John Milton, our Executive Vice President, and John Klopfenstein, our Chief Accounting Officer. First, let me run you through a brief disclosure regarding forward-looking statements and non-GAAP measurements used by the company. 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. To supplement the financial results presented in accordance with GAAP, FRP presents non-GAAP financial measures within the meaning of Regulation Z.

The non-GAAP financial measures referenced in this call are Net Operating Income, or NOI, and Pro Rata NOI. FRP uses these non-GAAP financial measures to analyze its operations and to monitor, assess, and identify meaningful trends in our operating and financial performance. This measure is not and should not be viewed as a substitute for GAAP financial measures. To reconcile NOI to GAAP, please refer to our most recently filed summary. Now, for the financial highlights from our second quarter results, net income for the second quarter decreased 72% to $600,000 or $0.03 per share versus $2 million or $0.11 per share in the same period last year, due primarily to due diligence-related legal expenses and lower interest income. The company's pro rata share of NOI in the second quarter increased 5% year over year to $9.7 million, mostly driven by higher contributions from our multifamily and mining royalty segments.

More specifically, versus the year-ago period, the multifamily segment contributed an additional $57,000 of NOI, and the mining segment contributed an additional $637,000 of NOI. It is worth noting that our industrial and commercial segment NOI decreased by $177,000 year over year, due mainly to the vacancy and uncollectible revenue as a result of a tenant eviction in Q1 and lease expiration ensuing future. We anticipate that we will see relatively flat NOI during 2025 versus 2024 as we work to lease up our Chelsea project and replace vacancies at our Cranberry Industrial Park this year and into the first half of 2026, whereafter we anticipate we will resume meaningful year-over-year NOI growth. I will now turn the call over to our Chief Operating Officer, David deVilliers, for his report on operations. David?

Speaker 2

Thank you, Matt, and good morning to those on the call this morning. Allow me to provide additional insight into the second quarter results of the company. Starting with our commercial and industrial segment, this segment consists of 10 buildings totaling nearly 810,000 square feet, which are mainly warehouses in the state of Maryland. Total revenues and NOIs for the quarter totaled $1.4 million and $1 million, respectively, a decrease of 5% and 15% over the same period last year. The decrease was due to 64,000 square feet of tenant leases expiring in Q2, 57,000 square feet attributed to a tenant defaulting on its lease, and the recent completion of a 258,000 square foot state-of-the-art Class A warehouse building in the Perryman Industrial Center of Harford County, Maryland, which was 100% vacant in the quarter.

These vacancies total 50% of the business segment, and a focus to lease and increase occupancy is a priority. Moving on to the results of our mining and royalty business segment, the division consists of 16 mining locations, predominantly located in Florida and Georgia, with one mine in Virginia. Total revenues and NOIs for the quarter totaled $3.6 million and $3.7 million, respectively, an increase of 12% and 21% over the same period last year. As for our multifamily segment, this business segment consists of 1,827 apartments and over 125,000 square feet of retail located in Rockland, D.C., and Greenville, South Carolina. At quarter end, 94% of the apartments were occupied and 83% of the retail space was occupied. Total revenues and NOI for the quarter were $14.6 million and $8.2 million, respectively. FRP's share of revenues and NOI for the quarter totaled $8.5 million and $4.7 million, respectively.

This is an increase over prior quarters due to the BERGS being included in this segment as of July 1, 2024. The BERGS contributed $2.8 million and $733,000 in revenue and NOI this quarter. As a same-store comparison, which includes Dock, Marin, Riverside, Fort Lee, Jackson, and Bryan Street, FRP's share of revenues and NOI for the quarter totaled $7.1 million and $4 million, respectively, a revenue increase of 3.2% with NOI up 1% over the same period last year. As stated in previous quarters, new deliveries in the D.C. market will continue to put pressure on vacancies, concessions, and revenue growth in the foreseeable future. However, we are seeing NOI growth in our Greenville, South Carolina properties, which had 3% in Q2. Management continues to be diligent in tenant retention and rental rates in the market.

We are pleased to have renewal success rates ranging from 52% to 75%, with renewal rental rate increases trending over 3.6% on average in Q2. Now on to the development segment. In terms of our commercial industrial development pipeline, our two industrial joint venture projects, where FRP is a majority partner with Altman Logistics Partners, are under construction. The projects are in Lakeland and Broward County, Florida, totaling over 382,000 square feet, and shell completion is anticipated by the summer of 2026. On July 23, 2025, subsequent to quarter one, we entered into a new joint venture agreement with Strategic Real Estate Partners, a private real estate development firm which specializes in industrial real estate development. We plan to break ground and develop over 375,000 square feet in two buildings in Lake County, Florida, near Orlando, with options for investment in additional industrial development on adjacent properties in the future.

We expect to break ground in Q3, with shell building completion expected in the second half of 2026. In Cecil County, Maryland, along the I-95 corridor, we are in the middle of pre-development activities on 170 acres of industrial land that will support a 900,000 square foot distribution center. Offsite road improvements, reforestation codes, and obtaining offsite wetland mitigation permits delayed our entitlement process, and we expect permits in early 2026 with a focus on attracting a build-to-suit opportunity. Finally, we are in the initial permitting stage for our 55-acre tract in Harford County, Maryland. The intent is to obtain permits for four buildings totaling some 635,000 square feet of industrial product. Existing land leases for the storage of trailers on site help to offset our carrying and entitlement costs until we are ready to build.

We submitted our initial development plan during the quarter, which puts us on track to have vertical construction permits in 2026 and the potential to start a 212,000 square foot building pending market conditions in 2027. Completion of these projects will add over 1.8 million square feet of additional industrial commercial product to our platform. Our three joint venture projects in Florida represent over 75,000 square feet in new product alone that will be available for lease-up in 2026. When stabilized, these projects are expected to generate annual NOI around $9 million, with FRP's share of NOI just under $8 million. Turning to our principal capital source strategy or funding ventures, Aberdeen Overlook consists of 344 lots located on 110 acres in Aberdeen, Maryland. We have committed $31.1 million in funding.

$27 million was drawn as of quarter end, and over $22.2 million in preferred interest and principal payments were received to date. A national home builder is under contract to purchase all the finished building lots by Q4 2027. 150 of the 344 lots were closed upon, and we expect to generate interest and profits of some $11.2 million, resulting in a 36% profit on funds drawn. In terms of our multifamily development pipeline, on May 30th of this year, we secured construction financing for our multifamily joint venture with Woodfield Development, known as Woven. This is our third multifamily project in Greenville, South Carolina.

This is an $87.8 million project with 214 units and 13,500 square feet of ground floor retail that is eligible to receive South Carolina Textile Rehabilitation Credits upon substantial completion and receive special source credits equal to 50% of the real estate taxes for a period of 20 years. The project is expected to be ready for lease-up in Q4 2027. In closing, uncertainty around trade policy, the economy, and financial markets has caused headwinds in leasing velocity. Firms are focused on existing supply chains and delaying leasing decisions until a clearer path forward reveals itself. However, rental rates remain strong. Industrial space under construction has fallen below pre-pandemic norms.

Market vacancies are expected to top out in the second half of 2025, and hopefully some clarity on tariffs will be forthcoming, which should all bode well for demand and rent growth as we deliver our new industrial projects in 2026. With the delivery of our 258,000 square foot Perryman warehouse in the quarter, we have over 400,000 square feet of vacant space in our industrial commercial segment, all located in Maryland. This will impact NOI in the short term, but will allow us the opportunity to re-lease space at the higher current market rates, bolstering NOI upon lease-up and occupancy. The average rental rate of the expiring industrial leases was $6.55 triple net, and we are hopeful most of our new rental rates start in the sevens or greater.

It is our plan to continue to monitor markets, assess the impacts of tariff uncertainty, focus on leasing of our existing industrial space, and manage the delivery of new industrial product for lease-up in 2026. Thank you, and I will now turn the call over to John Baker III, our CEO. Thank you, David, and good morning to all of those on the call. For the last two quarters, he has cautioned investors to temper their expectations regarding our NOI growth. The pace at which we were growing would have been difficult to maintain under the best of circumstances, but the pivot in asset classes we were focusing on developing also led us to believe NOI would be flat, if not slightly negative, during the time it would take us to lease up the first building in our industrial development growth strategy.

Results to the first half of 2025 are not inconsistent with those expectations, but also are more favorable than we might have expected. We are certainly not growing NOI at the same rate we've seen the last four years, but we have also not yet experienced the contraction in NOI we anticipated and warned investors might be a possibility. Q2 saw a 5% increase in pro rata NOI compared to last year, and we have grown our pro rata NOI by 7% through the first half of the year compared to the same period last year. We have seen nominal growth in our multifamily NOI, but almost all of our NOI growth is a result of increases in our mining and royalties NOI, which is up 21% in Q2 2025 compared to 2024 and 20% for the first six months.

The performance of this segment has been enough to offset NOI decreases in our industrial segment associated with the loss of our tenants at our Cranberry Industrial Park and the operating expenses of our new Chelsea building during the time it takes to get that asset occupied. Looking forward to the rest of the year, I still believe we will have all work cut out for us to match 2024's NOI numbers. If you recall, in Q3 2024, the company experienced a massive infusion of NOI in the mining and royalty segment due to a one-time minimum payment, which added $2 million in non-realized revenue in the segment's NOI. This streamlined across the heights of the lease for GAAP revenue purposes. From an NOI perspective, this payment happened all at once and is clearly not going to repeat in the third quarter of this year.

The shortfall is unlikely to be moved up through any increases in sales and price. Given that mining royalties has been the driver of NOI growth this year and the segment is unlikely to match its NOI numbers from Q3 due to a non-repeatable event, the flattening of NOI we have talked about for 2025 will in all likelihood start in the second half of this year. I clearly take no joy in putting a negative spin on another positive quarter, but as I have said countless times, we are not a quarter-to-quarter company. Our goal this year is to lay out the groundwork for future NOI growth by filling our vacancies, executing the projects we currently have under construction to our very high standards, and putting money to work in new projects.

Specifically, this means staying on track to deliver our two industrial JVs in Lakeland and Broward County, Florida, by the end of Q2 2026, continuing to entitle our industrial pipeline in Maryland so that all projects are shelved ready next year, and finally, our latest industrial joint venture to develop two warehouses totaling 377,892 square feet in Mineola, Florida, just outside of Orlando. This is another step in both our shifting focus to industrial as well as further expansion of our development footprint and the means we use to achieve this expansion on our way to doubling the size of our industrial portfolio by 2030. I will now turn the call over to any questions that you might have.

Speaker 1

At this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may withdraw yourself from the queue at any time by pressing star two. Once again, to ask a question, that is star and one. We'll pause a moment to allow any questions to queue. Once more, that is star and one for your questions. We'll take a question from David Foley with Esper Capital Management. Your line is open.

Good morning. How are you guys doing today?

Speaker 2

Good morning, David. How are you?

Good, thank you. Quick question. In the quarter, you spent a fair amount of money on legal for your refer to a potential new investment. I know you probably can't speak too much about that, but is that a shift in strategy, of what you're doing in terms of perhaps looking at something that's a little larger to go and buy, or is that sort of a process type thing, or what's sort of the thinking around that, I guess?

Thank you. I'd say it's not a shift in strategy, and you have kind of hit the nail on the head in terms of what we can and can't talk about. All we can say at this time is that we are pursuing a business opportunity, and those legal expenses are related to it.

Okay, seems like a big one.

Your word.

Thanks.

Speaker 1

That is star and one. We'll pause another moment to allow questions to queue. It does appear that there are no further questions at this time.

Speaker 2

All right. We appreciate all those who joined us on the call and are listening after the fact, and obviously appreciate your continued interest in investment in the company. We conclude the call at this time.

Speaker 1

This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful afternoon.