FRP HOLDINGS, INC. quarterly report, Q2 FY2021

FRP Holdings, Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2021. FRP is a real estate company focused on mining royalty lands, development, commercial property management, and stabilized residential joint ventures. Financial statements are unaudited and presented in thousands unless otherwise noted.

Financial Performance and Position

Metric	Three Months 2021	Three Months 2020	Six Months 2021	Six Months 2020
Total revenue	$8.5 million	$5.8 million	$14.3 million	$11.6 million
Operating profit (loss)	$(0.2) million	$1.2 million	$1.3 million	$2.0 million
Net income	$0.3 million	$4.0 million	$41.2 million	$5.5 million
Net income attributable to FRP	$0.1 million	$4.1 million	$28.5 million	$5.8 million
Diluted EPS	$0.01	$0.43	$3.03	$0.59
Net cash provided by operating activities	Not separately provided	Not separately provided	$11.0 million	$9.1 million

Six-month revenue increased 23.3%, driven by higher lease revenue and mining royalty revenue. Lease revenue increased 33.4% to $9.4 million; mining lands lease revenue increased 7.9% to $4.9 million.
Six-month operating profit declined 35.8% to $1.3 million because depreciation, depletion and amortization increased 96.5% to $5.8 million, primarily following consolidation of The Maren.
Six-month net income attributable to FRP increased 393.4% to $28.5 million, substantially reflecting a $51.1 million pretax gain from remeasurement of The Maren investment upon consolidation. The gain was partly offset by $10.4 million of income tax expense and $12.7 million attributable to the noncontrolling interest.
Net operating income, a non-GAAP measure, was $10.2 million for the first six months of 2021 versus $8.3 million in the prior-year period.
Cash and cash equivalents were $138.2 million at June 30, 2021, compared with $73.9 million at December 31, 2020. Including $32.1 million of investments available for sale, management described liquidity as more than $170 million.
Total assets increased to $681.3 million from $536.4 million at year-end 2020. Net real estate investments increased to $500.5 million from $379.4 million.
Secured notes payable were $178.3 million at June 30, 2021, compared with $90.0 million at December 31, 2020. The debt consists of fixed-rate mortgage loans at 3.03%, with principal due April 1, 2033 and interest-only payments.
The $20 million Wells Fargo revolving facility had no borrowings, $0.5 million of outstanding letters of credit, and $19.5 million available borrowing capacity. The company reported compliance with all debt covenants.

Material Changes Versus the Prior Comparable Period

The Maren reached stabilization in March 2021 and became consolidated effective March 31, 2021. This added its assets, liabilities, revenues, and expenses to FRP’s consolidated financial statements and generated the $51.1 million remeasurement gain.
The Maren contributed $2.2 million of second-quarter revenue. Consolidation increased recurring revenue and NOI but also added significant depreciation and amortization, including $1.9 million of quarterly amortization related to leases-in-place.
Second-quarter revenue increased 45.2% to $8.5 million, but operating profit fell to a $0.2 million loss from $1.2 million of profit. The stabilized joint venture segment reported a $1.4 million operating loss versus $0.4 million of profit, primarily because of Maren-related depreciation and amortization.
Second-quarter net income attributable to FRP declined 98.0% to $0.1 million. The prior-year quarter benefited from $3.6 million of real estate-sale gains, while the current quarter included only $0.8 million.
Interest expense increased by $1.3 million for the first six months, including a $0.9 million prepayment penalty associated with refinancing Dock 79. Interest income declined by $1.7 million because of bond maturities and repayment of The Maren preferred equity financing.
Investing cash flow increased to $52.4 million from $7.8 million, primarily due to the $16.1 million return of The Maren preferred equity financing with interest, increased bond sales and maturities, and cash acquired upon consolidation of The Maren.
Capital expenditures increased to $6.8 million from $1.2 million, primarily from development activity. FRP expects approximately $26.8 million of additional 2021 capital expenditures, including investments in joint ventures.
FRP repurchased 6,004 shares during the first six months at an average price of $43.95, compared with 298,303 shares repurchased in the prior-year period.

Operations, Outlook, and Management Commentary

Mining royalty revenue reached record second-quarter, first-half, and trailing-twelve-month levels. Second-quarter revenue increased 9.7%, and first-half revenue increased 7.9%. Management reported estimated remaining reserves of 506 million tons as of December 31, 2020.
Dock 79 residential occupancy remained above 94% for the third consecutive quarter. The Maren was 94.7% leased and 93.9% occupied at June 30, 2021; its retail space was fully leased, with occupancy expected after build-out.
FRP is developing industrial properties at Hollander Business Park, including two spec buildings and a build-to-suit project. The company also acquired 55 acres in Aberdeen, Maryland, for $10.5 million, with potential for more than 625,000 square feet of industrial development after entitlement.
Management expects Hollander shell completion in the third quarter of 2021 for one project and the fourth quarter of 2022 for the build-to-suit project. The Verge project is expected to be completed in the third quarter of 2022.
Management expects the District of Columbia rent freeze and pandemic-related effects on retail and leasing to continue at least through the remainder of 2021. Rent increases may not have a practical effect until February 2022 if emergency measures expire at year-end.
Management stated that consolidation of The Maren may negatively affect net income for some time because of increased depreciation and amortization, while positively affecting NOI and cash flow.
Key risks include COVID-19 effects, market demand and construction cycles, leasing and vacancy risk, entitlement and development delays, interest-rate and capital-market conditions, debt covenants, environmental liabilities, cybersecurity, inflation, tenant defaults, and concentration in Washington, D.C. and other selected markets.
One mining lessee represented 26.3% of consolidated revenue for the six months ended June 30, 2021. The company also holds cash at banks that may exceed FDIC insurance limits.
Known litigation and environmental matters were not expected by management to have a material adverse effect, but the company noted that additional environmental liabilities could arise.

Most Important Facts for Investors to Verify

Determine the recurring earnings and cash-flow contribution of The Maren after excluding the nonrecurring $51.1 million remeasurement gain.
Reconcile GAAP operating results with management’s NOI measure and assess the effect of Maren-related amortization and depreciation.
Monitor occupancy, rent growth, renewals, and retail leasing at Dock 79 and The Maren after expiration of District of Columbia rent restrictions.
Verify funding requirements, construction progress, leasing status, and entitlement timing for Hollander, The Verge, Bryant Street, and Greenville projects.
Assess leverage, refinancing restrictions, fixed-rate debt maturities, yield-maintenance premiums, letters of credit, and compliance with credit-facility covenants.
Evaluate exposure to the concentrated mining tenant and construction-market cycles affecting royalty revenue.
Review joint-venture losses, partner capital requirements, development guarantees, and the economic ownership adjustment for The Maren.
Confirm the company’s ability to fund approximately $26.8 million of remaining 2021 capital expenditures while maintaining its stated liquidity.