FRP Holdings, Inc. — 2023 Q3 Form 10-Q Summary
Business Context and Reporting Period
FRP Holdings, Inc. is a real estate investment, development and operating company with four reportable segments: Asset Management, Mining Royalty Lands, Development and Stabilized Joint Ventures. The filing covers the three and nine months ended September 30, 2023; financial statement amounts are in thousands unless otherwise stated.
Financial Results and Key Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $10,591 | $9,294 | $31,401 | $27,629 |
| Operating profit | $2,896 | $1,849 | $8,517 | $5,279 |
| Net income attributable to FRP | $1,259 | $480 | $2,422 | $1,809 |
| Diluted EPS | $0.13 | $0.05 | $0.26 | $0.19 |
| Operating margin | 27.3% | 19.9% | 27.1% | 19.1% |
- Q3 revenue increased 14.0%, while nine-month revenue increased 13.7%.
- Q3 net income attributable to FRP increased 162.3%; nine-month net income increased 33.9%.
- Net investment income was $2,700 in Q3 and $8,207 for the first nine months, primarily reflecting higher interest earned on cash and increased lending-venture income.
- Equity in losses of joint ventures was $2,913 in Q3 and $10,585 for the first nine months, driven principally by lease-up losses at The Verge and, year to date, .408 Jackson.
- Pro-rata NOI, a non-GAAP measure, was $8,090 in Q3, up 29.5%, and $22,687 for the first nine months, up 26.2%.
Balance Sheet, Cash Flow, Debt and Liquidity
- Total assets were $701,157 at September 30, 2023, including $527,737 of net real estate investments and $154,025 of investments in joint ventures.
- Cash and cash equivalents were $166,028, including $148,768 invested in U.S. Treasury notes maturing in 2023 through early 2024.
- Net cash provided by operating activities was $20,721 for the first nine months, compared with $13,175 in the prior-year period.
- Investing activities used $28,556, including $4,634 of property investment and $31,648 of investments in joint ventures, partially offset by $7,559 of joint-venture capital returns.
- Financing activities used $3,634, including $2,000 for share repurchases and $2,437 of distributions to noncontrolling interests.
- Secured notes payable were $178,668 net of debt issuance costs. The principal mortgage debt carries a fixed 3.03% rate, is interest-only, and matures April 1, 2033.
- The $20 million Wells Fargo revolving facility had no borrowings, $823 of letters of credit outstanding and $19,177 available at September 30, 2023. The company was in compliance with all debt covenants.
- Management expects approximately $22,300 of capital expenditures for the remainder of 2023, funded through cash and investments, operating cash flow, property sales and potential revolver borrowings.
Material Changes Versus the Prior Comparable Period
- Asset Management revenue increased 54.2% in Q3 and 46.4% year to date, primarily from higher occupancy and the addition of 1941 62nd Street. The segment was 95.6% leased and occupied at quarter end.
- Mining royalty revenue increased 24.7% in Q3 and 23.8% year to date. Royalties per ton increased 19.2% in Q3 and 13% year to date.
- Stabilized Joint Venture revenue increased 2.9% in Q3 and 3.1% year to date, but pro-rata NOI declined following the sale of FRP’s 20% tenancy-in-common interest in Dock 79 and The Maren. Segment operating profit also declined in Q3 because of higher operating costs and a $100 insurance deductible for elevator water damage.
- Development operating losses narrowed to $973 in Q3 from $1,322 and to $3,295 for the first nine months from $3,958.
- Interest expense increased 51.2% in Q3 and 46.8% year to date, partly because less interest was capitalized as fewer projects were under development.
- Cash declined $11,469 during the first nine months, compared with a $16,738 decline in the prior-year period.
Guidance, Outlook, Commentary and Risks
Management is temporarily shifting development away from new Washington, D.C. projects because of inflation, higher interest rates, construction costs and softer apartment-market conditions. The company is emphasizing less capital-intensive industrial development and is constructing a 259,200-square-foot speculative warehouse in Aberdeen, Maryland, with shell completion expected in the third quarter of 2024. The project is described as a $30 million investment.
Management reported strong mining royalty trends but disclosed that an $842 overpayment at one quarry will be deducted from future royalties, reducing future royalty revenue and growth until satisfied. Management also noted a post-COVID apartment supply glut in the Washington, D.C. market, negative rent trade-outs at Dock 79 and continued lease-up risk at The Verge and other development projects.
- Key risks include construction and development delays, entitlement and zoning uncertainty, leasing and occupancy changes, tenant defaults, competition, real estate illiquidity, interest-rate volatility, financing and capital-market conditions, environmental liabilities, inflation, cybersecurity and dependence on mining tenants.
- One mining lessee generated 24.6% of consolidated revenue for the first nine months and had $502 of accounts receivable at September 30, 2023.
- The company and a partner guaranteed $26 million of a Bryant Street construction loan, with FRP’s exposure limited by a side agreement to its proportionate ownership.
- Known litigation and environmental matters were not expected by management to have a material adverse effect, although the company cannot assure that all environmental conditions are known.
- The company does not pay cash dividends and stated that it has no present intention to do so. It repurchased 36,909 shares during the first nine months at an average cost of $54.19 per share.
Important Facts for Investors to Verify
- Reconcile the improvement in GAAP earnings with higher interest income and the continuing losses from unconsolidated joint ventures.
- Track lease-up, occupancy and rent trade-outs at The Verge, Dock 79, The Maren, Riverside and .408 Jackson.
- Monitor the $842 royalty overpayment recovery and its effect on future mining revenue.
- Assess funding needs and construction risk for the Aberdeen warehouse and the approximately $22.3 million of expected remaining 2023 capital expenditures.
- Review joint-venture debt, capital requirements and FRP’s exposure to development guarantees, particularly at Bryant Street and the other apartment projects.
- Confirm the availability and covenant capacity of the Wells Fargo revolver and the refinancing requirements for the 2033-maturity mortgage debt.