FRP - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered resilient topline and NOI growth despite lower GAAP net income: total revenues rose 4.2% year over year to $10,531k, pro rata NOI rose 21% to $9,103k, while net income fell to $1,679k ($0.09) due to lapping a prior-year one-time gain and higher G&A tied to succession planning.
• Mining Royalty Lands led performance with revenue up 19% and NOI up 34%; Multifamily NOI rose 22% on continued lease-up at The Verge and improving same-store metrics; Industrial & Commercial NOI declined 15% on an uncollectible tenant, with occupancy to trough in 2025 as leases roll at Cranberry.
• Management guided 2025 pro rata NOI to be flat to slightly down versus 2024 given industrial vacancies (Cranberry and Chelsea), non-repeatable 2024 one-time royalty income, and DC multifamily supply pressure; counterbalancing, FRPH plans ~$71M equity deployment into industrial and two new multifamily projects (810 units) to seed multi-year NOI growth.
• Near-term stock narrative catalysts: explicit caution on 2025 NOI trajectory, Chelsea completion/leasing timeline (Q2 2025 shell; NOI drag until stabilized), Florida industrial JV timing shift to Q2 2025, and investor push for capital returns (dividend discussion) alongside management’s illustrative NAV of $34.63–$39.22 per share.

What Went Well and What Went Wrong

What Went Well

• Mining strength: Q4 revenue +19% and NOI +34% on higher tons and positive swing in unrealized revenue; “Net operating income in this segment was $3,505,000, up $895,000 or 34%”.
• Multifamily momentum: combined pro rata NOI +22% YoY to $4,286k driven by The Verge lease-up (+$508k YoY) and same-store NOI +12%; management: “We are pleased to have renewal success rates over 60% with renewal rental rates trending over 2.5% in Q4”.
• Strategic pipeline: clear pivot to industrial development with ~$71M equity investment planned in 2025, two Florida JVs (Lakeland and Broward) moving to vertical construction in Q2 2025, and multi-year plan to double industrial square footage; CEO: “2025 is where we begin delivering on average 3 new industrial assets every 2 years”.

What Went Wrong

• GAAP earnings compression: Q4 net income declined 41.7% YoY to $1,679k ($0.09) due to lapping a $1.886M loan guarantee gain in Q4 2023 and higher G&A from succession plan; equity in loss of JVs rose $1,425k YoY.
• Industrial tenant issue: $222k allowance for uncollectible revenue and higher operating expenses reduced segment NOI by 15% YoY; occupancy at Cranberry expected to fall materially in 2025 as multiple tenants depart.
• 2025 growth pause: Management does not expect to match recent ~30% NOI CAGR; guidance flags flat/slightly lower 2025 NOI due to vacancies and non-repeatable royalty catch-up; DC multifamily faces a “glut of new projects” challenging rent growth.

Transcript

Operator (participant)

Good day, everyone, and welcome to today's FRP Holdings Incorporated 2024 4Q Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star, then the one key on your telephone keypad. You may withdraw yourself from the queue by pressing the star two key. Please note today's conference 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 Matt McNulty. Please go ahead.

Matt McNulty (CFO)

Thank you, Marjorie. Good morning. I am Matt McNulty, Chief Financial Officer of FRP Holdings Inc. And with me today are John Baker III, our CEO; David deVilliers III, our President and Chief Operating Officer; David deVilliers Jr., our former longtime President and now Senior Advisor; John D. Baker II, our Chairman; John Milton, our Executive Vice President and General Counsel; and John Klopfenstein, our Chief Accounting Officer. First, let me run through a brief disclosure regarding forward-looking statements and non-GAAP measures 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.

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 GAAP, FRP presents certain non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. The non-GAAP financial measures referenced in this call are net operating income, or NOI, and pro rata net operating income. FRP uses these non-GAAP financial measures to analyze its operations and to monitor, assess, and identify meaningful trends in its operating and financial performance. This measure is not and should not be viewed as a substitute for GAAP financial measures. To reconcile net operating income to GAAP net income, please refer to the segment titled Non-GAAP Financial Matters on pages 14 and 15 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 and 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 a sale of the asset or the associated costs or tax liability.

Good morning. It's Thursday, March 6.

Now, for our financial highlights.

We're acting in unison today.

Following our fourth quarter results.

To debate over where to put the country.

Net income for the fourth quarter decreased 41.7% to $1.68 million, or $0.09 per share, versus $2.88 million, or $0.15 per share in the same period last year. Last year's fourth quarter included a one-time gain of $1.98 million related to the termination of a loan guarantee at the Bryant Street project. For the year, net income saw a 20.4% increase to $6.39 million, or $0.34 per share, versus $5.3 million, or $0.28 per share last year, due mainly to the improved results in our multifamily segment. The company's pro rata share of NOI in the fourth quarter was up 21% to $9.1 million, and year-to-date was up 26% to $38.1 million.

The year-to-date pro rata NOI increase was mostly driven by the performance of our multifamily segment due to improved results at all six of our stabilized projects in this segment versus the same period last year. These six multifamily projects contributed an additional $4.6 million of pro rata NOI compared to last year. Versus last year, the mining segment contributed $2.7 million of additional NOI, and the industrial and commercial segment another $649,000. Over the last three years, we have grown pro rata NOI at a compound annual growth rate of 29.5% on a trailing 12-month basis. Earlier today, we posted to our website a brief slideshow of financial highlights for the fourth quarter, which includes, for illustrative purposes, an estimated value of our real estate assets, net of debt and liabilities. Our analysis yielded a per-share value in the range of $34.63-$39.22.

In our last release for Q3, we changed the way we valued the mining royalty asset stream from an EBITDA multiple to a cap rate valuation as management believes this methodology more appropriately reflects how these assets should be valued. Again, we provide this information to reflect how management views its various assets for the purpose of informing management decisions and do not necessarily reflect the price that would be obtained upon a sale of the asset or the associated cost or tax liability. I will now turn the call over to David for his report on operations. David.

David deVilliers III (President and COO)

Thank you, Matt. Good day to those on the call. Allow me to provide additional insight into the fourth quarter results of the company. Starting with our commercial and industrial segment, this segment consists of nine buildings totaling nearly 550,000 sq ft, which are mainly warehouses in the state of Maryland. At quarter end, 95.6% of the buildings were occupied. Total revenues and NOI for the quarter totaled $1.3 million and $992,000, respectively, a decrease of 11% and 15% over the same period last year. The decrease was due to a 50,000 sq ft tenant, which is 10% of this business segment, defaulting on its lease obligations. We are currently in the eviction process and expect control of the space in Q2 2025.

Moving on to the results of our mining and royalty business segment, this division consists of 16 mining locations, predominantly located in Florida and Georgia, with one mine in Virginia. Total revenues and NOI for the quarter totaled $3.5 million and $3.5 million, respectively, an increase of 19% and 34% over the same period last year. As for our multifamily segment, this business segment consists of 1,827 apartments and over 125,000 sq ft of retail located in Washington, D.C., and South Carolina. At quarter end, the apartments were 92.8% occupied, and the retail space was 62.6% occupied. Total revenues and NOI for the quarter were $14.1 million and $7.6 million, respectively. FRP's share of revenues and NOI for the quarter totaled $8.2 million and $4.3 million, respectively.

This is a significant increase over prior quarters due to our Bryant Street and 408 Jackson multifamily joint ventures being included in this segment as of January 1st, 2024, and the Verge being included in this segment as of July 1st, 2024. These three projects contributed $4.8 million and $2.2 million in revenue and NOI this quarter. As a same-store comparison, which only includes Dock, Marin, and Riverside, FRP's share of revenues and NOI for the quarter totaled $3.4 million and $2.1 million, respectively, an increase of 2% and 12.2% 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. Management continues to be diligent in tenant retention and rental rates in the market.

We are pleased to have renewal success rates over 60%, with renewal rental rates trending over 2.5% in Q4. Now on to the development segment. In terms of our commercial-industrial development pipeline, our 258,000 sq ft state-of-the-art Class A warehouse building in the Perryman Industrial Sector of Hartford County, Maryland, is nearing completion. The cold temperatures and wintry precipitation that hit the Mid-Atlantic toward the end of the quarter and most of Q1 2025 has delayed final paving and concrete truck pad installation. We do expect shell completion in Q2 2025, which will result in the asset moving from development to the industrial-commercial segment. This will impact NOI negatively until it is occupied and stabilized, whereafter the operating expenses can be passed through to tenants and receive rent revenue.

Our 200,000 sq ft Class A warehouse building in Lakeland, Florida, located along the I-4 corridor between Tampa and Orlando, where FRP intends to be a 90% partner with Altman Logistics Properties, is well into the construction drawing and permit stage. A construction loan term sheet was executed in Q4. Final pricing is underway, and we expect vertical construction to take place in Q2 2025. This project is estimated to cost some $141 per sq ft, with $9 triple-net rents. FRP and Altman also partnered on a two-building industrial project totaling over 182,000 sq ft in Broward County, Florida. The site is minutes from Port Everglades and the Fort Lauderdale-Hollywood International Airport, with frontage on I-595 accessing the Florida Turnpike and I-95. We are deep into the construction drawing and permit stage on this project as well. A construction loan term sheet was executed in Q4.

Final pricing is also underway, and we expect vertical construction to take place in Q2 2025. The project is estimated to cost some $327 per sq ft, with $20 triple-net rents. 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 sq ft distribution center. Off-site road improvements, reforestation codes, and obtaining off-site wetland mitigation permits delayed our entitlement process, and we now expect permits in early 2026. Finally, we are in the initial permitting stage for a 55-acre tract in Hartford County, Maryland. The intent is to obtain permits for four buildings totaling some 635,000 sq ft 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 expect to submit our initial development plan in Q2 2025, which puts us on track to have vertical construction permits in 2026. Completion of these industrial-commercial development projects will add over 2.1 million sq ft of additional industrial-commercial product to our industrial platform, growing the business segment from 550,000 sq ft to over 2.7 million sq ft. As stated in previous calls, permitting, constructing, and leasing the Perryman, Lakeland, Fort Lauderdale, and initial 212,000 sq ft building in Hartford County is our focus and goal over the next three years. These four buildings represent 850,000 sq ft of new industrial-commercial product, with a total project cost of $146 million. These projects represent some $8.7 million-$10.2 million in total NOI when stabilized, with FRP share of NOI ranging from $7.9 million-$9.2 million.

Turning to our principal capital source strategy for lending ventures, Aberdeen Overlook consists of 344 lots located on 110 acres in Aberdeen, Maryland. We have committed $31.1 million in funding. $26.5 million was drawn as of quarter end, and over $15.3 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. 100 of the 344 lots were closed upon, and we expect to generate interest and profit of some $6.8 million, resulting in a 22% profit on funds drawn. In closing, we are excited about delivering our new 258,000 sq ft Perryman Industrial Warehouse and look forward to expanding our industrial footprint with Altman Logistics in South Florida in 2025 with our Lakeland and Fort Lauderdale projects.

With new construction starts and deliveries falling to pre-pandemic norms, we expect market vacancies to top out in 2025, which should bode well for demand and rent growth as we deliver our new industrial projects. In 2025, we will have over 430,000 sq ft of vacant or rolling-over space in our industrial-commercial segment, all located in Maryland. This has the potential to impact NOI in the short term but allows us to re-tenant these spaces under 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. We expect short-term SOFR rates to remain stable for most of the year, with a slight chance of a potential rate cut deep into Q4.

With two floating-rate loans that have the potential to be refinanced in 2026, we will watch the 10-year treasury, which fell below four and a quarter this week, and the debt spreads to see if a more permanent and favorable debt structure is viable and inclusive to our cash flow. Construction costs are entering a period of uncertainty as we await the impact of tariffs on steel, lumber, and gypsum. It is our plan to continue to monitor these data points and make careful, calculated, and informed decisions. Thank you, and I'll now turn the call over to John Baker III, our CEO.

John Baker III (CEO)

Thank you, David, and good morning to all those on the call.

We have had a remarkable run of NOI growth over the last three years, fueled by developing and then occupying the remaining industrial parcels at our Hollander Business Park, the lease-up of three multifamily projects, and the continued success of our mining and royalty segment. As we mentioned in our earnings release yesterday, that level of growth is not sustainable, and we expect NOI in 2025 to remain flat, if not slightly below, 2024. We have vacancies in our industrial and commercial segment at our Cranberry Business Park and our new Chelsea building that will take time to fill and will have operating expenses that will negatively impact NOI compared to 2024. The mining and royalty segment is as strong as it has ever been, but 2024 NOI was positively impacted by a significant one-time payment, which, by its very nature, is not repeatable.

Our multifamily projects will find their NOI growth not through lease-ups but through increases on renewals and higher tradeouts, which will be a challenge for our D.C. assets as we compete with several new developments in our submarkets. The real growth for our company in 2025 is the investment taking place in our development segment as we look to deploy approximately $71 million in equity capital investments in 2025 that will bear fruit over the next five years and beyond. 2025 is where we begin delivering, on average, three new industrial assets every two years, with a five-year goal for doubling our industrial and commercial segment from 800,000 sq ft with the addition of Chelsea to 1.6 million sq ft.

We will begin construction on our two industrial JVs in Florida, continue to entitle and permit our existing industrial pipeline to be shovel ready in 2026, in an effort to augment that pipeline with a land purchase, joint venture, or potentially both. While our focus is industrial, we will continue to develop multifamily assets as long as they meet our return thresholds. In 2025, we anticipate moving forward with two multifamily developments in Florida and South Carolina that would add 810 units and an estimated $6 million in NOI upon stabilization. Industrial has always been our bread and butter, and we will continue to leverage our competitive advantage in that asset class where we have the most experience and control over. We believe multifamily joint ventures and growth markets, partners we know and trust, represent a useful hedge to our aggressive industrial development strategy.

I will now open the call to any questions that you might have.

Operator (participant)

Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, that is star one on your telephone keypad. You may withdraw yourself from the queue at any time by pressing star two. Again, that is star one for a question. We'll pause for just a moment to allow the questions to enter the queue. While we wait for those questions, we'll take our first question from Stephen Farrell with Oppenheimer. Please go ahead.

Stephen Farrell (Investment Management Associate)

Good morning.

David deVilliers III (President and COO)

Morning, Stephen.

Stephen Farrell (Investment Management Associate)

I just have a question if we can clarify the $71 million in equity capital investment. Is that including both industrial and the multifamily?

David deVilliers III (President and COO)

Yes, that's everything.

Stephen Farrell (Investment Management Associate)

Can you give a breakdown of, I guess, the Broward County, the multifamily, and then how much would be for existing or replenishing the pipeline?

David deVilliers III (President and COO)

Sure. Stephen, this is David deVilliers. As it relates to our two Florida industrial projects, Lakeland and Signature, we also have two other projects that I spoke about. That industrial, I'll call it pipeline, and the two Florida buildings, we're looking to deploy about $21 million in 2025, both for vertical construction of the Lakeland and Signature Florida projects as well as entitlements and permits for our two other industrial properties. In terms of the multifamily, we have several projects in the pipeline. One is in Astero, Florida. One is in Greenville, South Carolina. We also have two parcels in D.C., more or less along the Anacostia River between the soccer stadium and Nationals baseball stadium. Those projects represent the potential of $35 million of capital deployment to design, permit, and if we elect to go vertical in 2025, vertical construction at our Astero, Florida, and Greenville, South Carolina project.

That is a pretty big chunk of it. Some of the other stuff has to do with leasing CapEx of our existing portfolio. We have some additional dollars to further our lands that we are looking to sell to third-party national home builders. We do have our eyes set on new projects, as John discussed, whether that is a land purchase or potential JV or both. That number could be anywhere from $10 million-$25 million this year if we can find it and if we need to close on the land this year. A lot of times, we are able to push land closing off until we get all of our entitlements, but we have allocated capital to close on the land if that is what it takes. That is kind of a high-level breakdown of those tranches to get up to the $71 million.

Stephen Farrell (Investment Management Associate)

No, that's a good breakdown. Thank you. For the acquisitions, are you looking around Maryland? Is it down in Florida? Is there any specific areas that are popping out?

David deVilliers III (President and COO)

I mean, I would say that our focus is in the southeast. Maryland is our backyard. Right now, it's just harder to get entitlements. It's harder to do business in Maryland than the southeast right now. It's our backyard, and if there's an opportunity in Maryland that we like, we'll take it. We're definitely looking at the southeast, given all the just the drivers that are happening in the southeast right now.

Stephen Farrell (Investment Management Associate)

Do you think there's any potential to acquire an existing property, whether it's just in distress or someone looking to exit or cap rates kind of away from what we would pay?

David deVilliers III (President and COO)

I mean, right now, cap rates are away. We see a lot of stabilized assets that we can pick up, call it low four or high four, low five cap rates. A lot of them are trading 5% in place NOI. That just feels a little thin for us. There are a lot of loans that were done three, four, five years ago, as you know, in the high twos and threes, and you're not getting that right now. We will see if something pops up in the distressed market.

Stephen Farrell (Investment Management Associate)

Just to ask about the tariffs, how do you think that impacts the flow of goods around Maryland and what's the impact to industrial there?

David deVilliers III (President and COO)

If they stay in place and they're consistent, I think it will have an impact. The two industrial buildings that we're looking to do in Florida, we kind of have gotten ahead of that, and we're looking to move forward before the steel tariffs come in place so those projects are unaffected. If tariffs remain in place in Canada, where a lot of our lumber comes from, some of these potential multifamily projects, we're going to have to take a look and just see where all that lands. I think if they stay and they're consistent, it's going to have an impact more on the multifamily than on industrial, in my mind.

Stephen Farrell (Investment Management Associate)

Oh, that's good. Thank you, guys.

Operator (participant)

Ladies and gentlemen, that is star one for a question. We'll take our next question from Bill Chen with Rhizome Partners. Please go ahead.

Bill Chen (Managing Partner)

Hey, guys.

Matt McNulty (CFO)

Hey, Bill.

David deVilliers III (President and COO)

Hey, Bill.

John Baker III (CEO)

Hey.

Bill Chen (Managing Partner)

Good morning. I was just wondering, we track the multifamily warehouse space fairly closely, be it like the big pumping rigs, but also we just talk with a lot of GPs out there. What are you guys underwriting to these new projects that you're looking to put dollars out the door this year? Can you go through, if possible, by multifamily, by industrial, and then if you could segment it by geography as well, just so that we can get a sense of what are the unlevered returns on these development projects?

Matt McNulty (CFO)

Yeah. Yeah, we do put targets on each project, and we do tend to try to look at a specific market to determine if that return rate should be higher or lower based on what we envision the cap rates being on the other side. I would say just generally right now, it's somewhere in the 6.5%-7% return on cost in the first year of stabilization, untrended. It's kind of where we are. Obviously, we hope and we do underwrite conservatively. We hope that when we get to the other side that we've had some cost savings and/or we get higher rents than we put in the model, but that's kind of our break line.

Bill Chen (Managing Partner)

Gotcha. Is that 6.5%-7% for both multifamily and industrials, or is there a little bit of difference between the two asset classes?

Matt McNulty (CFO)

I'd say it kind of moves between 6% and 7% multifamily, depending on where the project is. I think we were targeting somewhere around 6.25% to 6.5% on the most recent one that we were looking at. D3, you probably actually have those numbers specifically that we had targeted for Woven and.

David deVilliers III (President and COO)

Yeah. Yeah. No, Matt, you're 100% correct. I mean, the location is a big factor. The industrial building in southern Florida, sitting right outside Fort Lauderdale by the airport, is probably one of the most resilient markets that we do business in. That return on cost, we can look to, you can target something lower than a 6.5%. Multifamily, again, depending on where it is, we're kind of targeting that 6.5%-7% in Astero, Florida, and Greenville, South Carolina. I mean, that 6.5%-7% range is a pretty good target. Once you get into these more resilient core markets, maybe there's an argument for that 6.5%. If you get outside some of these core markets and the next exit up, that 7% is more of a bullseye.

Bill Chen (Managing Partner)

Gotcha. That's an untrended number?

David deVilliers III (President and COO)

That's trended.

Bill Chen (Managing Partner)

That's trended. Okay.

David deVilliers III (President and COO)

Trended in kind of that year one stabilization.

Bill Chen (Managing Partner)

I mean, just to clarify, are you baking in, are you using today's rent? Are you baking in 2%-3% annual rent increases between when you put a shovel in the ground to when it, because these things take time to build and take time to stabilize?

David deVilliers III (President and COO)

They do, and we constantly update it. I mean, when we get into these things, Bill, I mean, you take the current rental rate, and we basically say, for industrial, you have a year of design and permitting. You have a year of construction. Depending on the size of the building and market, you have another year to get to kind of that first year of stabilization. We do. We take kind of the current rental rate. We see what the historic trend and escalations are. We see what people are putting in their leases. We make a decision. We have seen extraordinary rent growth. The historic curve, we do not believe in. We are kind of taking current rates and putting a 2%-2.5% escalator on that. You can argue if that is conservative or aggressive or what, but that is what we do.

Bill Chen (Managing Partner)

Gotcha. Thank you for clarifying that. Also, FRP is in this unique situation where it's got a large cash holding. We pay a lot of attention to the market, and the construction start has just absolutely fallen off a cliff. In these projects that you're moving forward with, are you finding yourself to be kind of the only game in town from a development perspective, or if you could give us some color on, if there were 10 projects previously, what are you guys seeing? Are you down to two, three projects? Any commentary on competition for GC, general contractors? Are you seeing some kind of relief on the cost pressure the past few years? We've seen absolute relentless cost inflation on the construction side. Any color on any of these that are just mentioned would be great.

David deVilliers III (President and COO)

Right. No, you're absolutely correct. I mean, new deliveries, new starts, it has been a cliff. I think kind of in 2022, we were just on a new start delivery that was non-sustainable. We're kind of back to the pre-pandemic norms, in my mind. It just feels different to GCs and to our vendors. It's not so much material pricing, but they have come down on their fees and their profit. We've been able to get very, very aggressive numbers and fees and profits from our GCs. I would say this. I think that a lot of our competition went really, really fast. Right now, they can't take that jump, whether it's their risk appetite or their balance sheet or I can't answer for them.

We see a great opportunity in the markets that we have targeted to build in 2025 when a lot of people just aren't, and being able to deliver in 2026 and be one of the only games in town, one of the only new construction projects delivering. We think that's an advantage.

Bill Chen (Managing Partner)

No, I agree with you. I think that it seems like the only people developing these days are large cap rates with very low leverage so they could issue unsecured bonds and kind of one-off companies like yours. Okay. No, that's helpful. Would you say that the are you at pre-pandemic levels, or are you kind of below? Are the markets you're in, are they at pre-pandemic normal construction, or are you guys actually below that at this point in your markets?

David deVilliers III (President and COO)

I think that's an interesting question. I'll just say, from an overall speak to industrial, from an overall industrial pipeline, I was reading a report done by Newmark. They kind of said that at the end of Q4, the industrial kind of the pipeline declined to 322 million sq ft. That is the lowest level of supply under construction since 2019. They were saying that the pipeline is projected to fall to 2018 levels by the end of 2025. I think we're kind of based on that, and I kind of agree. I feel like we're back in this 2018, 2019 level. Depending on what happens with tariffs and interest rates and some other programs coming out of the White House, it's either going to make it harder to start or it may go the other way. Your crystal ball's as good as mine.

To answer your question, I think we're kind of in that 2018, 2019 period.

Bill Chen (Managing Partner)

Gotcha. Okay. Thank you for that. Appreciate that. Going on the Cranberry repositioning and then also on Chelsea a little bit, on the retail market, you mentioned there's like 400,000 sq ft of lease expirations. Is that all? I don't think that's all within Cranberry. That's with Hollander in there as well, right? Is that correct?

David deVilliers III (President and COO)

That is really all. It's pretty much all in Cranberry. And it's also the new Chelsea building of 258,000 sq ft.

Bill Chen (Managing Partner)

Okay. Gotcha. I mean, in the prior market, you gave a blended rate, but really, I mean, those are really two different asset classes. I think Chelsea, based on my memory, if I'm correct, was really like a $9 market, and then Cranberry is an older product. I'm assuming, can you just kind of break down? My understanding is when you bought Cranberry, you guys kind of got it for a song, put some CapEx into it, and it's generally kind of like a smaller business or relatively, right? As opposed to Chelsea is like a bigger, just like a newer, more Class A. My question there is, can you help us understand? We learned of the one tenant getting evicted in Cranberry. Can you talk about what the market looked like to backfill that?

When those leases renew, one, if tenants want to move out, how easy would it be? How easy or how difficult would it be to backfill those spaces? What does the in-place rent look like versus market?

David deVilliers III (President and COO)

Sure. I would say that, just to give you some history, when we bought Cranberry, most of the leases, let's just say, were in the $4. And most of those leases were in place three, four, five years ago. They were all done prior to this great increase in rental rates. I would say that most of the expiring leases at Cranberry are in the high fives, low sixes. To your point, this is a mix of smaller tenants. Let's just say sub-25,000 sq ft. We do have some below 50,000 sq ft. Most of them are kind of in that, let's just say, 25,000-50,000 sq ft range. That market is really, really good. It's very strong. The bigger tenants, the 200s, the 300s, the 500,000s, that demand is way down. The smaller-sized tenants, it's strong. It's out there.

The market calls for sevens. Depending on improvements in term and everything else that can move around, given our basis at Cranberry, we have the ability to go after tenants and backfill that space strongly and still make a very, very solid return given the basis of our project. At the same time, we want market rents, and that's what we want. That's what we're going to go after. It's going to take time. It's all one market. We're not going to get it all done in one year. Over the next two years, there's no reason why we can't backfill that space, get that Cranberry back to where it was with rental rates instead of the previous term rental rates.

Bill Chen (Managing Partner)

What do you think that occupancy number is going to get down to? I mean, if you can help me understand, is that Cranberry's 268,000 sq ft? You got the one tenant, which is 10%. Okay. You backfill that. But are most of the expiring leases going to stay in place? I don't imagine this massive move-out of all the tenants, right? I mean, or is there, or is that a different situation where we expect most tenants to move out and backfill that space?

David deVilliers III (President and COO)

We expect all of the tenants to leave. The reason why 57,000 sq ft defaulted on us, they're not coming back. That in and of itself will take Cranberry from 96% occupancy to 60% occupancy. We have another tenant that built their own building. When that's done, we fully expect them to leave. The other lease is a government contract lease. That government contract lease is no longer valid, so they're leaving. The other tenants have said that we're not renewing. We expect everyone to leave. We expect the occupancy to get very, very low at Cranberry. Hopefully, they all do not expire on the exact same date. Cranberry is going to be a major, major focus.

Bill Chen (Managing Partner)

I see. Okay. I wasn't expecting. I mean, is there something about the nature of the tenants there? I mean, obviously, someone can't pay rent. That's one thing. Is there something about the nature of that? Is it intentionally a transitional asset type? Or is there, I'm just kind of a little surprised by that.

David deVilliers III (President and COO)

I see this as fairly, I won't say normal, but we expect rollover. These leases, they happen to be one tenant wanted a three-year, one wanted a five, one wanted a seven. It was very important for them. It just happened to kind of these leases line up over 2025, in different quarters of 2025. It is kind of the nature of the industrial cycle. I think we're cautiously optimistic about the rollover because now we're able to renew at market rents. We believe in the product. We believe in the size spaces that we have. We really like where the market has gone and look forward to retenting these spaces at a much higher rental rate.

Bill Chen (Managing Partner)

What about Chelsea? How's any color on the leasing velocity there?

David deVilliers III (President and COO)

That building, because of the winter, we were not able to put the final coat of paving down, and we were not ready to finish the truck work. In Q4 of 2024 and Q1 of 2025, those quarters, we do not expect a lot of action or communication during those months, especially when the building is not done and there is not a distinct delivery time. As we move into Q2, we do expect to have some paper trade hands and see if we can start getting some velocity. Right now, there have been some phone calls. There have been some tours. There have kind of been people kicking tires. You have got some action, but it is all talk. We look forward to getting some term sheets and being able to deliver. We did get a permit for a tenant improvement build-out that we have in hand that we just got.

If we have someone, we hope that will accelerate our ability to get them in and occupying. We're trying to decrease that timeline to do a deal, to permit, to construct, and ultimately get them in.

Bill Chen (Managing Partner)

Gotcha. Thank you for that thought. On the multifamily, I think you mentioned that you're moving forward with a project on the Anacostia. Is that phase III, what would be next to the Marin?

David deVilliers III (President and COO)

We had two adjacent sites next to Dock and Marin known as phase III and phase IV. Those were under our PUD, a hotel and an office site. We made the decision a couple of years ago that hotel and office were not two asset classes that we thought were the highest and best use on that site. We embarked on modifying our existing PUD to get the zoning in place to do two multifamily developments there. We expect to get that zoning approval in Q2 of 2025 of this year. We have two years of entitling, getting construction drawings to be able to be in a position to have the opportunity to go vertical there. Those are two sites that we're looking at.

We would probably start phase iV first, which is on the river, and work our way slightly back to phase three that would be adjacent to Marin.

Bill Chen (Managing Partner)

Okay. So that's at the Beer Garden right there, right?

David deVilliers III (President and COO)

What's this?

Bill Chen (Managing Partner)

That's the Beer Garden, the Culp, or?

David deVilliers III (President and COO)

Correct. That would be the phase four site that we would start at.

Bill Chen (Managing Partner)

Gotcha. If you do something, the capital's not going out in 2025. That's likely a 2027 if you move forward with that.

David deVilliers III (President and COO)

It's going to be based on market conditions and what we see in our assets. That timing, I can't argue that that's too conservative or too aggressive.

Bill Chen (Managing Partner)

Gotcha. Okay. All right. I think I got I think I have all my I think thank you for addressing all questions I have. I mean, if I may, I obviously I ran a shareholder at this point for 10 years. I do not know if John Milton's on the call, but I remember when I went down and met with John and the initial phone call. This year marks my decade as a shareholder in the company. I track the company very closely. I appreciate you guys giving me the platform to voice my opinion. I would just like to leave with two comments. One, I think that we've been involved for a really long time. I think everyone in the company has done a really good job.

I think the candor and the way that you communicate with shareholders is excellent, as is the feedback from other shareholders. I do want to just keep pushing on the idea that, especially in today's environment where a shareholder could kind of disaggregate the assets between the multifamily holdings and the industrials, and we kind of get large-cap pure plays that pay a nice dividend and maybe not get to the same level of undervaluation. There was a time where I think FRP, the company traded at a much lower, much bigger discount than some of the parts, right? I think today, there's companies out there like you could buy a basket of a pick your multifamily exposure, pick your warehouse exposure, and then you kind of recreate the company. There's a current yield that comes with it.

That is part of some of the frustration that I hear from other shareholders, but also myself as a shareholder where there's, I'm okay if the company doesn't want to buy back any shares, but I think some sort of return of capital in the form of dividend would be helpful. I know you guys have a lot of iron. You got a lot of projects lined up. There's a lot of capital. The company also is cash flowing a lot. You guys have done a wonderful job growing the NOI. I think a dividend, even if you started out at 1%, at a 1% yield, I think it demonstrates to shareholders that there is a plan and intention to return that capital and give us some yield, right? Even if it's a small 1% because from a total return perspective, getting some current dividend helps.

I think it will also solve another problem, which is the trading liquidity issue. I think there are certain shareholders who just won't buy a real estate company without any sorts of yield. I will keep pushing for that because I think it's important. I think it's something that, and I don't say this lightly, I would not have advocated this in 2021, 2022 because there's a lot of buildings that we're still stabilizing. There's still a lot of dollars going out the door. I think we're at a point where there's very high-quality recurring NOI between them. These are some of the best multifamily buildings. The aggregate royalty business is some of the best business I've seen. I think the company could afford to pay something small like a 1% dividend.

I just want, I know I've said this before, but I appreciate you guys giving me the platform to kind of voice my opinion as a decade-plus shareholder. I'll end it there. The other comment that I just want to kind of mention is I would also mention that from a cap rate perspective, we've been tracking multifamily cap rates since the Fed started raising rates. We've seen a lot of deals transact. We've seen the Blackstone deal. We've seen the KKR-Lennar deal. We've also seen a lot of smaller deals. I would say that this portfolio, Marin, Dock 79, Bryant Street, Hersh, and Jackson and Riverside, and I've seen all these assets with the exception of Greenville.

I would say that you're probably too conservative with the cap rate, as you mentioned earlier on the call, that on the acquisition side, really, it's in the high fours, low fives. I'm just coming to see a high end of five, six for an asset of this quality that is this young on the river where people can't build more except for what FRP owns. I think it's just a little bit too punitive because I've seen I think there was a time when people were like, "What will multifamily cap rates shake out at?" I think we've had probably two years. We've seen some big deals. We've seen some small deals. We talked to a lot of real estate GP.

A lot of real estate GPs would be very happy to buy this portfolio but 20 years older and pay a 5% cap rate for it. That is just some thought that I want to leave the company with. I have no further questions. I want to thank everyone for fighting the fight and for being very upfront and candid with the shareholders. I appreciate that.

John Baker III (CEO)

Yeah. Billy, thank you for all of that. Just to comment on your last point, the cap rates in some of the parts analysis are really, for illustrative purposes, we have no intention to sell anything right now. Whatever the cap rate is, it's really not important since we're going to hold on to the assets. We would love you to be correct in our estimate to be conservative whenever we come around to selling them. Right now, what we're focused on are the NOI and cash flows and growing those. If cap rates stay at the level that you think they are, then the assets are only going to accumulate in value. Thank you for all of your insight and opinions and commentary. Happy 10-year anniversary.

Bill Chen (Managing Partner)

Thank you. I mean, it's been a wonderful experience. If I allow, I just want to give a little bit more feedback on the cap rates. I think I communicate to everyone that hopefully one day my kids just inherit my shares in this company. I think everyone in the company kind of thinks that way. I think that part of the issue is just that I kind of joke that sometimes I'm paid IR for the company because a lot of prospective shareholders reach out to me. They know that I'm knowledgeable about the company and whatnot. I think when they see a company publish a map, I know that there's no intention of you selling that.

I will say I remember having a conversation with David deVilliers II, and he told me that when you got a building like that on the river and you got that view that no one could build any more in front of you, you build that once and you just sit on your butt, right? Which I totally agree with. My family owns stuff for 20, 30 years, and we never sold any of it. I totally agree that there's no intention of selling any of this. I think what I'm getting at is that when a prospective shareholder, when a new shareholder looks at this and they see the stock trade at where it trades at and they see the company put out a NAV in that $35-$39 range, they kind of just throw up their hand and say, "Oh, this isn't cheap enough.

There's not enough of a discount to private liquidation value. It's not that you are or aren't going to sell those assets. I think that, I think that, I don't think that, I mean, from a company communication perspective, the company definitely has a reputation for being conservative. I think that, again, I keep praising the company for being very forthfront and candid. I just think that a NAV value that best approximates a real market arm's length transaction is the best too for shareholders because I think in the long run, we're all in it together in that from a trading liquidity perspective, from a price discovery perspective, as everyone in the company works diligently to build value over time, hopefully some of that discount to NAV shrinks over time and it sets up this beautiful compounding from today, right?

I think that if 60 basis points in multifamily, 60 basis points in cap rate delta in multifamily is a really big deal. That is where I am coming from. That is where I think that, and then just like you have that great still nine to ten years left on that 3% mortgage. That is a huge asset. I am not saying be aggressive. I am just saying that I think getting that NAV to best approximate market as the company continues to grow, as the company continues to add value, grow NOI, and you guys are all doing the right thing. I think that letting shareholders, I mean, not everyone is, I kind of pride myself with doing a lot of work on the company, right? I have seen a lot of these assets, but not every shareholder will do that level of diligence.

I think that when we have a NAV that is best approximate what a fair market is, it's a good starting point for people. They could drill down into it. That creates a mechanism for how that discount shrinks over time. That's kind of my feedback to what was explained. I wouldn't want you, I wouldn't want the company to sell any of these assets in today's interest rate environment.

John Baker III (CEO)

Yeah. Bill, I think that's a very fair point. I think I understand your point, and I will do my job to go and dig deep into the cap rates we're using, current transactions, and brokers to see if there's any room for adjustment on any particular markets or assets.

Bill Chen (Managing Partner)

Thank you. I appreciate that.

John Baker III (CEO)

Last thing we're going to do is be aggressive, but to be overly conservative doesn't help either. Let me just do a little digging, and the team here will get to make some changes if they're warranted.

Bill Chen (Managing Partner)

Thank you for that. Appreciate it.

John Baker III (CEO)

Okay. Thanks, Bill. We appreciate all your feedback.

Operator (participant)

I'd now like to turn the call back over to our speakers for any final or closing remarks.

John Baker III (CEO)

Thank you for your continued interest in the company, and this concludes the call.

Operator (participant)

Thank you. Ladies and gentlemen, that does conclude today's presentation. We appreciate your participation. You may hang up at any time.