FRP Holdings, Inc. 10-Q Summary
Reporting period: Three months ended March 31, 2021; filed May 12, 2021. FRP is a real estate holding company operating in asset management, mining royalty lands, development, and stabilized joint ventures. Financial statement amounts are in thousands unless otherwise noted.
Financial Highlights
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $5,853 | $5,783 | 1.2% |
| Operating profit | $1,442 | $794 | 81.6% |
| Income before taxes | $51,396 | $2,100 | $49,296 increase |
| Net income | $40,875 | $1,499 | $39,376 increase |
| Net income attributable to FRP | $28,373 | $1,618 | $26,755 increase |
| Diluted EPS | $3.03 | $0.16 | $2.87 increase |
| Net cash from operating activities | $3,420 | $3,983 | $(563) |
| Cash and cash equivalents | $116,843 | $73,909 at Dec. 31, 2020 | $42,934 increase |
| Secured notes payable | $178,321 | $89,964 at Dec. 31, 2020 | $88,357 increase |
Revenue consisted of $3,538 of lease revenue, down 1.7%, and $2,315 of mining lands lease revenue, up 5.9%. Operating margin improved to approximately 24.6% from 13.7%, primarily because total operating costs declined 11.6% to $4,411. Net income and EPS were substantially affected by a $51,139 gain on remeasurement of The Maren investment.
At March 31, 2021, total assets were $680,031, shareholders’ equity was $395,756, total equity including noncontrolling interests was $427,635, and investments in joint ventures were $143,900. FRP reported $51,171 of investments available for sale. Management separately described total cash and cash equivalents plus escrow as $117,377.
Material Changes Versus Q1 2020 and Year-End 2020
- The Maren reached stabilization and FRP became the primary beneficiary for accounting purposes, resulting in consolidation beginning March 31, 2021. The transaction generated a $51,139 remeasurement gain, including $13,012 attributable to the noncontrolling interest and a $10,314 deferred tax adjustment.
- The Maren’s consolidation added approximately $88,000 of mortgage debt and significantly increased consolidated real estate assets. Prior periods remain accounted for under the equity method.
- FRP refinanced Dock 79 and The Maren with $92,070 and $88,000 loans, respectively. The loans bear fixed interest at 3.03%, require interest-only payments, and mature April 1, 2033. The prior $90,000 Dock 79 loan was repaid and a $900 prepayment penalty was included in interest expense.
- Interest expense increased to $925 from $51, partly because of the refinancing and prepayment penalty. Equity in losses of joint ventures increased to $1,635 from $642, primarily due to The Maren and Bryant Street lease-up and depreciation costs.
- Operating performance improved in Asset Management and Mining Royalty Lands, while Stabilized Joint Venture operating profit declined to $217 from $507. Development operating loss narrowed to $805 from $1,486.
- Operating cash flow declined despite higher net income because the major remeasurement gain was noncash. Investing cash flow increased to $38,524 from an investing outflow of $15,488, primarily due to a $16,426 return of capital from joint ventures and $23,701 of investment-sale proceeds.
- FRP repurchased 6,004 shares at an average price of $43.95, compared with 82,491 shares repurchased in Q1 2020.
Liquidity, Debt, and Capital Resources
- FRP had no borrowings under its $20 million Wells Fargo revolving credit facility, $448 of outstanding letters of credit, and $19,552 available for borrowing at March 31, 2021. The company was in compliance with its covenants.
- Management stated that liquidity exceeded $160 million, comprising cash, investments available for sale, and revolving availability.
- Projected 2021 capital expenditures for real estate and joint ventures were approximately $31,100 for the remainder of the year, expected to be funded primarily with cash, investments, operating cash flow, property sales, and credit facilities.
- FRP had no variable-rate debt at March 31, 2021, although several unconsolidated joint venture loans use LIBOR-based rates. The company does not pay cash dividends and stated it has no present intention to do so.
Outlook, Commentary, Risks, and Unusual Items
- Management expressed optimism regarding recovery from COVID-19, increased vaccinations, and improving activity at its Washington, D.C. properties. It expected pandemic-related retail, attendance, and rent-freeze effects to continue at least through the first half of 2021.
- Mining royalty revenue reached a quarterly and trailing-twelve-month record according to management. The segment owns approximately 15,000 leased acres and had estimated remaining reserves of 506 million tons at December 31, 2020.
- Dock 79 residential occupancy was 94.10% at quarter-end; The Maren was 92.80% leased and 92.04% occupied. Cranberry Run was 87.6% leased and occupied, compared with 54% approximately one year earlier.
- Bryant Street was approximately 94% complete and expected to be completed in the fourth quarter of 2021. 1800 Half Street was 16% complete and expected to be completed in the third quarter of 2022. Riverside and .408 Jackson were 73% and 37% complete, respectively.
- Key risks include COVID-19 effects, construction and development execution, zoning and entitlement delays, occupancy and lease renewals, tenant defaults, mining-cycle exposure, interest rates, liquidity and refinancing conditions, joint venture performance, environmental liabilities, competition, and cyber risks.
- One major environmental matter involving the former underground storage tanks at the Bryant Street property received a No Further Action Letter from the District of Columbia Department of Energy and the Environment on March 15, 2021.
- One mining lessee represented 30.6% of consolidated revenue in Q1 2021, creating customer concentration risk. Management stated that known litigation and environmental matters were not expected to have a material adverse effect, while noting that environmental liabilities could change.
Investor Verification Checklist
- Verify the sustainability of earnings excluding the $51.1 million noncash Maren remeasurement gain and related noncontrolling-interest and tax effects.
- Review the accounting impact of The Maren consolidation, including fair-value assumptions, revised ownership economics, debt, and future revenue and expense presentation.
- Assess whether Dock 79 and The Maren occupancy, retail leasing, and rent collections support projected NOI after COVID-19 restrictions ease.
- Reconcile consolidated debt with debt held by unconsolidated joint ventures and review guarantees, maturities, covenant requirements, and LIBOR-related exposure.
- Evaluate the approximately $31.1 million remaining 2021 capital requirement against projected operating cash flow, cash balances, investment maturities, and revolver availability.
- Monitor construction completion, lease-up, entitlement, and financing milestones for Bryant Street, 1800 Half Street, Riverside, .408 Jackson, Hollander, and Aberdeen.
- Review concentration exposure to the largest mining lessee and the effect of construction activity and aggregate demand on royalty revenue.
- Confirm related-party charges under the Patriot Transition Services Agreement; Q1 2021 charges were $256 compared with $290 in Q1 2020 and are not necessarily arm’s-length.