FRP Holdings, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
FRP Holdings, Inc. is a real estate development, asset management and operating company focused on commercial and industrial properties, mining royalty lands, development projects and stabilized joint ventures in the Mid-Atlantic and southeastern United States. This filing covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022. The company had 9.5 million common shares outstanding as of May 12, 2023.
Financial performance and key metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $10.114 million | $8.707 million | 16.2% increase |
| Operating profit | $2.854 million | $1.364 million | 109.2% increase |
| Operating margin | 28.2% | 15.7% | Improved |
| Net income | $406,000 | $404,000 | 0.5% increase |
| Net income attributable to FRP | $565,000 | $672,000 | 15.9% decrease |
| Diluted EPS | $0.06 | $0.07 | Decreased |
| Net cash from operating activities | $4.687 million | $1.314 million | Increased |
| Capital expenditures | $1.206 million | $3.636 million | Decreased |
| Pro-rata NOI | $6.988 million | $5.178 million | 34.9% increase |
- Lease revenue rose 8.8% to $6.832 million, while mining lands lease revenue increased 35.3% to $3.282 million.
- Mining royalty lands generated $2.790 million of operating profit, up 33.6%, benefiting from the Astatula acquisition and higher revenue at nearly every active location.
- Asset Management revenue increased 27.5% to $1.070 million. The segment ended the quarter 99.4% leased and 91.4% occupied, with pro-rata NOI up 60.6% to $787,000.
- Stabilized Joint Venture revenue increased 4.3% to $5.276 million, and operating profit increased to $804,000 from $366,000. Pro-rata NOI was $2.022 million, down 5.4% because FRP sold a 20% interest in Dock 79 and The Maren in late 2022.
- Equity in losses of joint ventures increased to $3.625 million from $1.604 million, primarily due to lease-up losses at The Verge and .408 Jackson.
- Net investment income increased to $2.382 million from $898,000, primarily because of higher interest earned on cash equivalents.
- Interest expense increased to $1.006 million from $738,000, partly because less interest was capitalized on development projects.
- First-quarter 2022 included a $733,000 gain on the sale of excess Brooksville property; Q1 2023 included only $10,000 of gains on real estate sales.
Balance sheet, debt and liquidity
- Total assets were $699.599 million at March 31, 2023, compared with $701.084 million at December 31, 2022. Net real estate investments were $520.469 million.
- Cash and cash equivalents were $173.299 million, including $128.053 million invested in U.S. Treasury notes. Cash declined by $4.198 million during the quarter.
- Total liabilities were $254.414 million and total equity was $445.185 million.
- Secured debt was $178.594 million, consisting primarily of fixed-rate mortgage loans bearing 3.03% interest and maturing April 1, 2033. The company reported no variable-rate debt at quarter end.
- The $20 million Wells Fargo revolving credit facility had no borrowings, $562,000 of letters of credit outstanding and $19.438 million available. FRP was in compliance with all debt covenants.
- Operating cash flow was $4.687 million. Investing cash outflows of $8.755 million primarily reflected $12.766 million invested in joint ventures, partially offset by $4.988 million of returned joint-venture capital.
- Management expects approximately $83.9 million of capital expenditures and investments during the remainder of 2023, to be funded through cash and investments, operating cash flow, property sales and credit facilities.
Material changes, outlook and risks
- Management reported the highest mining royalty revenue quarter in company history for the second consecutive quarter. Royalty revenue increased 35.35% year over year, and royalty revenue for the last twelve months exceeded $11 million for the first time.
- The Verge was 32.0% leased and 23.6% occupied at quarter end. .408 Jackson was 52.9% leased and 29.1% occupied. These lease-up activities contributed materially to joint-venture losses.
- At Bryant Street, the 487 residential units were 90.8% leased and occupied; commercial space was 84.2% leased and 79.0% occupied.
- The Maren and Dock 79 reported average residential occupancy of 95.54% and 92.79%, respectively. Renewal rent increases averaged 7.98% at The Maren and 4.52% at Dock 79.
- FRP expects to remain selective regarding new investments because of rising interest rates and construction-cost inflation. Management stated that it has no plans for a major share repurchase or special dividend, although it may repurchase shares opportunistically below net asset value.
- Key risks include cyclical construction activity affecting mining royalties, tenant vacancies and defaults, lease renewals, apartment demand, development and entitlement delays, interest-rate and capital-market conditions, project financing, environmental liabilities, inflation, competition, cybersecurity and risks associated with joint ventures.
- One mining lessee represented 26.3% of consolidated revenue in Q1 2023 and had $645,000 of accounts receivable, creating customer concentration risk.
- The company and MRP guaranteed $26 million of construction debt for the Bryant Street Partnerships, with FRP’s obligation limited by a side agreement to its proportionate ownership. The filing states that known litigation and environmental matters are not expected to have a material adverse effect, but additional liabilities cannot be ruled out.
- The filing identifies a related-party Administrative Services Agreement with Patriot Transportation Holding. Charges allocated to FRP were $225,000 in Q1 2023 versus $223,000 in Q1 2022; management cautions that such allocations may not be on an arm’s-length basis.
Important facts for investors to verify
- Progress, occupancy and cash requirements for The Verge, .408 Jackson, Bryant Street and other joint-venture developments.
- Whether mining royalty growth remains sustainable and the effect of the largest lessee’s concentration on revenue and receivables.
- Actual 2023 capital spending relative to the approximately $83.9 million expected remainder-of-year requirement.
- Interest-rate, construction-cost and refinancing exposure, including the April 2033 maturity of the $180.070 million fixed-rate mortgage principal.
- Future cash distributions, potential share repurchases and the impact of the revolving-credit facility’s covenant-based dividend restriction.
- The company’s non-GAAP pro-rata NOI calculation and reconciliation to GAAP results when assessing operating performance.