FRP HOLDINGS, INC. quarterly report, Q2 FY2015

FRP Holdings, Inc. — Fiscal 2015 Second-Quarter 10-Q Summary

Reporting period: Quarter and six months ended March 31, 2015. The filing was signed May 8, 2015. FRP completed the spin-off of its transportation business into Patriot Transportation Holding, Inc. on January 30, 2015 and now operates as a real estate company. Transportation results are presented as discontinued operations.

Business Context

FRP operates three reportable segments: Asset Management, Mining Royalty Land, and Land Development and Construction. Asset Management owns and leases warehouse and office properties primarily in the Baltimore, Washington, D.C., and Northern Virginia markets. Mining Royalty Land earns royalties and rents from mining properties, principally in Florida and Georgia. Land Development and Construction develops or sells land and constructs income-producing properties.

Key Financial Metrics

Metric	Three Months Ended March 31, 2015	Three Months Ended March 31, 2014	Six Months Ended March 31, 2015	Six Months Ended March 31, 2014
Total revenue	$8.948 million	$8.007 million	$17.250 million	$15.236 million
Operating profit	$2.159 million	$2.469 million	$4.504 million	$4.645 million
Income from continuing operations	$0.845 million	$1.312 million	$1.976 million	$2.478 million
Net income	$1.361 million	$1.704 million	$4.155 million	$4.044 million
Diluted EPS from continuing operations	$0.09	$0.14	$0.20	$0.26
Diluted EPS	$0.14	$0.18	$0.42	$0.42

All dollar amounts in the table are approximate and presented in millions except per-share data. Continuing-operations operating margin was approximately 24.1% for the quarter and 26.1% for the six-month period, compared with approximately 30.8% and 30.5%, respectively, in the prior-year periods.

Segment revenue, second quarter: Asset Management $7.330 million, Mining Royalty Land $1.335 million, and Land Development and Construction $0.283 million.
Segment operating profit, second quarter: Asset Management $2.951 million, Mining Royalty Land $0.941 million, and a $0.879 million loss in Land Development and Construction.
Occupancy: Asset Management portfolio totaled approximately 3.602 million square feet; overall occupancy was 88.8% at March 31, 2015, versus 89.8% a year earlier. Average annual occupancy increased to 91.4% from 89.9%.
Discontinued operations: Transportation contributed $0.516 million of after-tax income in the quarter and $2.179 million for the six months.
Balance sheet: Total assets were $252.085 million and shareholders’ equity was $177.887 million at March 31, 2015, compared with $313.071 million and $206.315 million, respectively, at September 30, 2014. The reduction primarily reflects the transportation spin-off distribution.
Cash flow: Six-month operating cash flow was $8.271 million, investing cash flow was $(5.399) million, and financing cash flow was $(3.194) million. Cash declined by $0.322 million to $0.691 million.
Capital expenditures: Six-month capital expenditures were $2.429 million. Management expects approximately $10.498 million of fiscal 2015 real estate development capital expenditures.

Debt, Liquidity, and Capital Resources

Total debt was $53.488 million at March 31, 2015, consisting of $11.304 million drawn on the revolver and $42.184 million of mortgage notes. The current portion of secured debt was $4.049 million.
FRP replaced its former $55 million credit facility with a new five-year Wells Fargo revolving facility capped at $20 million. At March 31, 2015, $2.610 million of letters of credit were outstanding and $6.086 million remained available for borrowing.
The company was in compliance with its debt covenants. The revolving facility is variable-rate debt; management estimated that a 1% increase in rates would increase annual interest expense by approximately $0.113 million.
FRP expects to close a new $20 million secured revolving facility with First Tennessee Bank during the third quarter of fiscal 2015 and an additional $20 million secured term loan by the end of calendar 2015. These financings were commitments or expectations at the filing date and were not yet closed.
FRP does not currently pay cash dividends. The board authorized up to $5 million for share repurchases, but no shares were repurchased during the first six months.

Material Changes Versus Prior Comparable Period

Quarterly revenue increased 12%, but operating profit declined 12.6% and income from continuing operations declined 36%.
Six-month revenue increased 13%, while operating profit declined 3.0% and income from continuing operations declined 20%.
Asset Management operating profit increased 10.9% for the quarter and 18.4% for the six months, supported by portfolio growth and higher occupied square footage.
Mining Royalty Land operating profit increased 7.1% for the quarter and 6.7% for the six months; tons mined increased 15% and 16%, respectively.
Land Development and Construction losses widened to $0.879 million for the quarter and $1.518 million for the six months, primarily because of higher property taxes, bulkhead exploratory work, and Riverfront environmental remediation costs.
Corporate expenses rose because of higher bonus accruals, director compensation, medical claims, costs absorbed after the spin-off, and non-recurring spin-off expenses. Spin-off-related costs were $0.107 million in the quarter and $0.307 million for the six months.
Interest expense increased by $0.310 million in the quarter and $0.466 million for the six months. The increase included a $0.116 million mortgage prepayment penalty and $0.015 million of deferred loan costs expensed upon early repayment.

Outlook, Commentary, Risks, and Unusual Items

Management is focused on expanding the Asset Management portfolio and converting non-income-producing land into income-producing properties or sale proceeds.
FRP expected to close the $11.188 million Windlass Run residential Phase II sale by August 31, 2015 and intended to seek replacement investments, potentially through a Section 1031 exchange.
Construction of Riverfront Phase I began in October 2014. The project is a 305-unit apartment building with approximately 18,000 square feet of retail space; lease-up is expected during 2016 and 2017.
FRP recorded an additional $0.100 million environmental remediation expense for Riverfront Phase I and recognized a $0.140 million loss from its share of joint-venture remediation costs during the quarter. The company’s recorded remediation obligation was capped at $1.871 million under its agreement, but actual costs could be higher or lower depending on expenditures and potential recovery from a prior tenant.
FRP is pursuing a claim that the prior tenant is responsible for contaminated-soil removal costs. The filing states that remediation obligations for Riverfront Phases II through IV generally do not arise unless construction begins.
Key risks include construction and mining cycles, demand and occupancy for warehouse and office properties, interest rates and financing availability, zoning and entitlement delays, regional economic conditions, environmental remediation, competition, and dependence on major mining customers.
One mining lessee generated 63.9% of Mining Royalty Land segment revenue, creating customer-concentration risk.
No formal earnings or revenue guidance was provided. Management’s outlook is subject to the completion of development projects, property sales, financing transactions, market conditions, and entitlement approvals.

Most Important Facts for Investors to Verify

Whether the expected First Tennessee financing transactions closed on the projected timetable and on acceptable terms.
Whether the Windlass Run Phase II sale closed by August 31, 2015 and whether proceeds were redeployed into income-producing assets.
Actual Riverfront remediation costs, any recovery from the prior tenant, and the impact on the company’s joint-venture investment.
Riverfront Phase I construction progress, financing, cost-to-complete, and the timing and pace of lease-up.
Asset Management occupancy, tenant retention, rental-rate trends, and exposure to the Baltimore-Washington-Northern Virginia market.
Mining royalty volumes and the financial condition and lease status of the segment’s largest customer.
Availability under the revolver, future debt maturities, variable-rate exposure, and compliance with financial covenants.
The effect of post-spin-off corporate costs and Patriot transition-service charges on recurring profitability.