FRP Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
FRP Holdings, Inc. is a real estate company focused on mining royalty lands, commercial and residential real estate ownership, land development, and stabilized joint ventures. The filing covers the three and nine months ended September 30, 2021; financial statement amounts are in thousands unless otherwise noted.
The company reports four segments: Asset Management, Mining Royalty Lands, Development, and Stabilized Joint Ventures. The Maren became consolidated beginning March 31, 2021 after reaching stabilization, materially changing reported assets, debt, revenue, depreciation, and noncontrolling interest.
Key financial metrics
| Metric | Three months ended September 30 | Change | Nine months ended September 30 | Change |
|---|---|---|---|---|
| Total revenue | $8.5 million | +38.9% | $22.8 million | +28.7% |
| Operating profit | $0.7 million | -53.7% | $2.0 million | -43.7% |
| Net income attributable to FRP | $0.4 million | -93.5% | $28.8 million | +156.7% |
| Diluted earnings per share | $0.04 | Down from $0.57 | $3.07 | Up from $1.16 |
| Net cash from operating activities | Not provided for the quarter | — | $16.4 million | Up from $13.4 million |
Third-quarter operating margin was approximately 8.6%, compared with approximately 25.9% in the prior-year quarter. Nine-month operating margin was approximately 8.8%, compared with approximately 20.2% in the prior-year period. The decline reflects higher depreciation and amortization, particularly from The Maren.
- Lease revenue increased 73.3% in the quarter and 46.9% year to date, primarily due to The Maren consolidation.
- Mining royalty revenue declined 10.3% in the quarter to $2.2 million but increased 1.5% year to date to $7.2 million, the segment’s highest nine-month revenue total.
- Net income for the first nine months included a $51.1 million gain from remeasurement of The Maren investment. The gain was partly offset by $10.5 million of income taxes and $12.2 million of income attributable to noncontrolling interests.
- Equity in losses of joint ventures was $4.0 million for the first nine months, compared with $3.8 million in the prior-year period.
- Reported nine-month net operating income, a non-GAAP measure, was $15.9 million, compared with $12.7 million in 2020.
Balance sheet, debt, liquidity, and cash flow
- Total assets were $678.8 million at September 30, 2021, compared with $536.4 million at December 31, 2020. Net real estate investments were $503.8 million, compared with $379.4 million.
- Cash and cash equivalents were $162.9 million, compared with $73.9 million at year-end. Investments available for sale were $4.3 million, compared with $75.6 million.
- Secured notes payable were $178.4 million, compared with $90.0 million at year-end. The debt consists primarily of fixed-rate mortgage loans bearing 3.03% interest and maturing April 1, 2033; principal payments are deferred until maturity, subject to loan terms.
- The $20 million Wells Fargo revolving facility had no borrowings, $0.5 million of letters of credit outstanding, and $19.5 million available at September 30, 2021. The company was in compliance with all debt covenants.
- Operating activities provided $16.4 million of cash. Investing activities provided $73.0 million, principally from investment sales and maturities, the return of The Maren preferred financing, and cash consolidated with The Maren. Financing activities used $0.5 million.
- Capital expenditures were $11.6 million during the first nine months. Management expected approximately $9.3 million of additional real estate-related capital expenditures for the remainder of 2021.
Material changes versus the prior comparable period
- The Maren was consolidated after stabilization, adding rental revenue and operating expenses but also increasing depreciation and amortization. The transaction generated the $51.1 million remeasurement gain.
- Dock 79 and The Maren were refinanced in March 2021 with approximately $180 million of fixed-rate debt at 3.03%. Dock 79’s prior 4.125% loan was repaid, including a $0.9 million prepayment penalty recorded in interest expense.
- Quarterly revenue growth was more than offset by higher operating costs, depreciation, and interest expense. The prior-year quarter also benefited from $5.7 million of real estate-sale gains, which did not recur.
- Year-to-date net investment income declined $2.5 million because of bond maturities and repayment of The Maren preferred interest. Real estate-sale gains declined $8.5 million from the prior year.
- The company repurchased 6,004 shares during the first nine months at an average price of $43.95, compared with 379,809 shares repurchased in the prior-year period.
Outlook, management commentary, risks, and unusual items
- Management expects to deploy available cash over the next several years into development projects and intends to remain opportunistic regarding stock repurchases. No formal earnings guidance was provided.
- Management expects construction of the newly acquired 17-acre Harford County site to begin in the third quarter of 2022 after entitlements, with potential capacity for a 260,000-square-foot warehouse.
- Hollander Business Park construction was underway, including two speculative buildings and a build-to-suit project. The company expects shell completion of certain projects in late 2021 and 2022.
- The Maren was 93.56% leased and 95.45% occupied at quarter-end; Dock 79 maintained occupancy above 94% for the fourth consecutive quarter. Washington, D.C. rent-freeze measures limited rent increases on renewals and were expected to affect results through at least the end of 2021.
- COVID-19 effects continued to affect retail leasing and activity at Washington, D.C. and Greenville properties. Other risks include construction and entitlement delays, vacancies, tenant defaults, competition, interest-rate and capital-market conditions, inflation, environmental liabilities, cybersecurity, and general real estate development risk.
- One mining lessee represented 23.8% of consolidated revenue for the first nine months, creating tenant concentration risk. Cash deposits may exceed FDIC insurance limits.
- On October 8, 2021, the company committed up to $31.1 million to an Aberdeen Station residential development venture at a 10% interest rate plus a potential share of sales proceeds based on project returns. Entitlements were still being pursued.
- Management stated that known litigation and environmental matters were not expected to have a material adverse effect, but the filing provides no assurance that additional environmental liabilities will not arise.
Important facts for investors to verify
- Separate recurring operating performance from the $51.1 million nonrecurring The Maren remeasurement gain and prior-year real estate-sale gains.
- Assess the effect of The Maren’s elevated depreciation and amortization on GAAP earnings versus its reported contribution to NOI and cash flow.
- Monitor leasing, occupancy, rent growth, and the expiration of Washington, D.C. rent-freeze measures at Dock 79 and The Maren.
- Review construction budgets, entitlement status, completion dates, lease-up progress, and funding requirements for Hollander, The Verge, Bryant Street, Riverside, .408 Jackson, and Aberdeen Station.
- Evaluate leverage, refinancing terms, covenant headroom, the $19.5 million revolver availability, and the company’s planned use of its substantial cash balance.
- Monitor the concentrated mining-tenant exposure and the sensitivity of royalty revenue to construction activity and mining volumes.