FRP Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
FRP Holdings, Inc. is a real estate company operating through asset management, mining royalty lands, land development and construction, and RiverFront on the Anacostia apartment investments. This unaudited report covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. The company had 10,014,667 common shares outstanding at March 31, 2018.
Financial Results and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenues | $12.622 million | $9.322 million | +35.4% |
| Operating profit | $2.858 million | $3.404 million | -16.0% |
| Income before taxes | $1.608 million | $2.385 million | -32.6% |
| Net income | $1.029 million | $1.443 million | -28.7% |
| Net income attributable to FRP | $1.560 million | $1.443 million | +8.1% |
| Diluted EPS | $0.15 | $0.14 | +7.1% |
| Cash flow from operations | $5.325 million | $4.882 million | +9.1% |
| Capital expenditures | $1.584 million | $3.729 million | -57.5% |
- Rental revenue increased 45.9% to $9.165 million, primarily due to the consolidation of Dock 79 beginning July 1, 2017. Mining royalty and rent revenue increased 0.6% to $1.750 million, and reimbursement revenue increased 31.3% to $1.707 million.
- Operating margin declined to approximately 22.6% from 36.5%, primarily because operating costs rose 65.0%, including higher depreciation, operating expenses and property taxes.
- Net income attributable to FRP benefited from a $531,000 loss allocated to the noncontrolling interest in Dock 79. Reported company-level net income increased despite lower consolidated net income.
- Cash and cash equivalents were $6.961 million at March 31, 2018, compared with $4.524 million at December 31, 2017. Total assets were $417.984 million and total equity was $265.398 million.
- Debt totaled $117.231 million, including $112.983 million of long-term debt and $4.248 million due within one year. Debt declined from $118.317 million at December 31, 2017.
- The company had no borrowings under either its $20 million Wells Fargo revolver or its $20 million First Tennessee revolver. Wells Fargo had $17.710 million available after $2.290 million of letters of credit; the First Tennessee facility had $20.000 million available.
- FRP generated $2.437 million of net cash during the quarter. It used $1.548 million in investing activities and $1.340 million in financing activities.
Material Changes Versus the Prior Comparable Period
- Dock 79 was consolidated for the first full comparable quarter in 2018. It contributed $2.425 million of revenue but generated a $714,000 segment operating loss before corporate expenses and a $953,000 interest expense allocation.
- Asset Management revenue increased 11.6% to $8.128 million. Occupied square feet rose 5.6% to 3.721 million, and occupancy increased to 93.4% from 90.8%. Segment cash-basis NOI increased to $5.857 million from $5.689 million.
- Mining Royalty Lands operating profit decreased to $1.541 million from $1.559 million despite broadly stable revenue.
- Land Development and Construction reported an operating loss of $806,000, improved from a $903,000 loss, while revenue increased to $297,000 from $275,000.
- Equity in losses of joint ventures improved to $12,000 from $771,000, principally because Dock 79 was consolidated rather than accounted for under the equity method.
- Interest expense increased to $1.243 million from $248,000 because of the Dock 79 financing. Depreciation, depletion and amortization increased to $4.283 million from $2.059 million.
- Results included $747,000 of expenses associated with the pending sale of the industrial warehouse portfolio.
Guidance, Outlook, Risks and Unusual Items
- On March 15, 2018, FRP entered into an agreement to sell 41 warehouse properties and two additional land parcels to an affiliate of Blackstone Real Estate Partners for a purchase price subject to adjustment of $358.9 million. Closing required shareholder approval and other customary conditions; management expected closing shortly after the May 14, 2018 annual meeting.
- The properties were expected to be presented as a discontinued operation after shareholder approval. Management stated that it was evaluating reinvestment opportunities for a significant portion of the proceeds, particularly in development, mining royalty and RiverFront activities.
- Management expected approximately $10.156 million of 2018 capital expenditures for development and acquisitions, with $1.584 million incurred through March 31, 2018.
- On May 4, 2018, after quarter-end, FRP and MRP formed a joint venture for RiverFront Phase II. FRP contributed land valued at $16.3 million and $2.3 million of cash; the project obtained an EagleBank construction facility permitting draws of up to $71 million.
- The sale transaction could fail to close, potentially resulting in business disruption, unrecovered transaction costs, a termination fee of up to $22.5 million and reimbursement of the purchaser’s expenses under certain circumstances.
- Following the proposed sale, FRP would be substantially smaller. Management identified risks involving reduced revenue and assets, difficulty deploying proceeds, cost control, retention of personnel, and possible failure to satisfy Nasdaq continued-listing standards.
- Other risks include tenant concentration, construction and development activity, leasing and vacancy levels, interest rates, access to capital, environmental remediation, entitlement approvals, joint-venture performance and competition. One mining lessee represented 10.5% of consolidated revenue for the quarter, and one asset-management tenant represented 9%.
- The company had a $2.037 million environmental remediation liability. Management stated that ordinary-course litigation and claims were not expected to have a material adverse effect, while noting that actual remediation costs could vary materially from the recorded estimate.
- FRP reported no variable-rate debt outstanding at March 31, 2018 and was in compliance with its credit agreement covenants. The company does not pay cash dividends and had $4.883 million authorized for future share repurchases, with no repurchases during the quarter.
Investor Verification Checklist
- Verify shareholder approval, closing, final purchase-price adjustments and debt repayment associated with the Blackstone-affiliated asset sale.
- Reconcile the final discontinued-operations presentation and determine the amount and timing of net sale proceeds available for reinvestment.
- Assess post-sale revenue, asset base, liquidity, operating expenses and Nasdaq listing compliance for the retained business.
- Monitor Dock 79 occupancy, lease renewals, rental growth, interest expense and noncontrolling-interest allocations.
- Track RiverFront Phase II construction financing, project costs, entitlements and future capital requirements.
- Review tenant concentration, mining royalty volumes and construction-market conditions affecting royalty revenue.
- Confirm the status and potential cost of the $2.0 million environmental remediation obligation and other contingencies.