FRP HOLDINGS, INC. quarterly report, Q2 FY2023

FRP Holdings, Inc. — Form 10-Q Summary

Reporting period: Three and six months ended June 30, 2023. The filing was signed August 10, 2023. FRP is a real estate investment, development and operating company with four reportable segments: Asset Management, Mining Royalty Lands, Development and Stabilized Joint Ventures.

Financial Performance and Position

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Total revenue	$10.696 million	$9.628 million	$20.810 million	$18.335 million
Operating profit	$2.767 million	$2.066 million	$5.621 million	$3.430 million
Net income attributable to FRP	$598,000	$657,000	$1.163 million	$1.329 million
Diluted EPS	$0.06	$0.07	$0.12	$0.14
Net cash from operating activities	Not separately provided	Not separately provided	$12.853 million	$8.807 million

Q2 operating margin was approximately 25.9%, compared with 21.5% in Q2 2022. Six-month operating margin was approximately 27.0%, compared with 18.7%.
Q2 net margin attributable to FRP was approximately 5.6%; six-month margin was approximately 5.6%.
At June 30, 2023, total assets were $699.896 million, including $526.574 million of net real estate investments and $152.587 million of investments in joint ventures.
Cash and cash equivalents were $166.537 million, down from $177.497 million at December 31, 2022. The company held $151.861 million of U.S. Treasury notes maturing in 2023 through early 2024.
Debt was $178.631 million, consisting primarily of fixed-rate mortgage loans at 3.03% with principal due April 1, 2033. The company had no borrowings under its $20 million revolving credit facility, $432,000 of letters of credit outstanding and $19.568 million available.
The company was in compliance with all debt covenants at June 30, 2023. Total equity was $444.992 million.

Cash Flow, Capital Allocation and Liquidity

Operating cash flow increased to $12.853 million from $8.807 million, primarily due to improved operating profit and higher interest income.
Investing cash outflow was $21.931 million, including $26.634 million invested in joint ventures, partially offset by $6.897 million of returned joint-venture capital.
Joint-venture investments included approximately $8 million for FRP’s share of a Bryant Street loan paydown, $11 million for the Aberdeen Station lending venture, $3.4 million related to higher interest costs at The Verge and $1.9 million for predevelopment activities.
Financing cash outflow was $1.882 million, including a $1 million share repurchase and $1.685 million of distributions to noncontrolling interests.
Management expects approximately $38.2 million of capital expenditures for the remainder of 2023, to be funded with cash and investments, operating cash flow, property sales and potential credit-facility borrowings.

Material Changes Versus the Prior Comparable Period

Q2 revenue increased 11.1% and six-month revenue increased 13.5%. Lease revenue rose 10.2% in Q2 and 9.5% year to date; mining lands revenue rose 13.2% in Q2 and 23.3% year to date.
Operating profit increased 33.9% in Q2 and 63.9% year to date, reflecting stronger performance across all four segments.
Asset Management revenue increased 55.7% in Q2 and 42.2% year to date, supported by higher occupancy and the addition of 1941 62nd Street. Portfolio occupancy was 95.6% at quarter-end versus 84.3% a year earlier.
Mining royalty revenue reached a record second quarter and increased 9.9% on a per-ton basis. Management reported the highest trailing twelve-month royalty revenue in segment history.
Net investment income increased $2.005 million in Q2 and $3.489 million year to date, primarily from higher yields on cash equivalents and increased lending-venture income.
Equity in losses of joint ventures increased to $4.047 million in Q2 and $7.672 million year to date, primarily because of lease-up losses at The Verge and .408 Jackson.
FRP’s net income attributable to the company declined 9.0% in Q2 and 12.5% year to date despite higher operating profit, reflecting increased joint-venture losses, higher interest expense and the absence of a $733,000 property-sale gain recorded in the first half of 2022.
Pro-rata NOI increased 16.3% in Q2 to $7.61 million and 24.5% for the first six months to $14.60 million. Stabilized Joint Venture pro-rata NOI declined following the sale of a 20% tenancy-in-common interest in Dock 79 and The Maren.

Outlook, Commentary, Risks and Unusual Items

Management expects to continue pursuing entitlements and development preparation but intends to delay vertical multifamily construction until lending markets and financing conditions improve. Warehouse development may be pursued using cash because higher construction-loan rates have reduced competition.
Management cited inflation, higher interest rates, construction-cost inflation, financing availability and margin compression as significant development risks.
Lease-up remained in progress at The Verge, which was 68.6% leased and 43.3% occupied at quarter-end. The residential portion of .408 Jackson was 85.9% leased and 76.2% occupied; retail was fully leased but under construction.
One mining tenant accounted for 25.3% of consolidated revenue for the six months ended June 30, 2023. Loss or termination of this tenant’s lease could materially affect results.
On August 8, 2023, a mining tenant asserted that it had overpaid royalties by approximately $840,000. FRP was reviewing the claim, and the ultimate outcome was uncertain.
FRP and MRP guaranteed $26 million of a Bryant Street construction loan, subject to a side agreement limiting FRP’s obligation to its proportionate ownership. The recorded value of the guarantee was $1.9 million.
The company is exposed to environmental liabilities, tenant defaults, vacancies, lease-renewal risk, real estate-market cycles, development and entitlement risk, joint-venture performance, interest-rate volatility, cyber risks and potential restrictions under its credit facility.
FRP repurchased 18,340 shares during the first six months at an average price of $54.52 per share. The company stated that it does not pay cash dividends and has no present intention to do so.
Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting.

Important Facts for Investors to Verify

Progress and profitability of lease-up at The Verge and .408 Jackson, including the effect of joint-venture losses on consolidated earnings.
Resolution and potential financial impact of the approximately $840,000 mining royalty overpayment claim.
Occupancy, rent growth and renewal rates across Dock 79, The Maren, Riverside and the commercial asset portfolio.
Funding and timing of the approximately $38.2 million remaining 2023 capital plan, including exposure to higher financing and construction costs.
Liquidity after planned joint-venture investments and the maturity profile of the $178.6 million of debt.
Concentration risk from the mining tenant representing 25.3% of six-month consolidated revenue.
Cash-flow conversion and the sustainability of higher interest income, mining royalties and pro-rata NOI relative to GAAP earnings.