FRP Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2020; filed August 14, 2020. Unless otherwise noted, amounts are in thousands. FRP is a real estate holding company focused on mining royalty lands, development land, commercial properties and apartment joint ventures. Prior industrial warehouse operations remain classified as discontinued operations.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $5,849 | $6,363 | $11,632 | $12,077 |
| Operating profit | $1,204 | $2,107 | $1,998 | $3,462 |
| Operating margin | 20.6% | 33.1% | 17.2% | 28.7% |
| Income from continuing operations | $3,977 | $2,952 | $5,476 | $4,593 |
| Net income attributable to FRP | $4,149 | $9,825 | $5,767 | $11,723 |
| EPS attributable to FRP, diluted | $0.43 | $0.99 | $0.59 | $1.17 |
| Cash flow from operating activities | Not separately provided | Not separately provided | $9,110 | $8,161 |
Net investment income was $2,110 in the quarter and $4,101 for the six months, including realized gains of $134 and $242, respectively. Gains on real estate sales were $3,589 in the quarter and $3,597 for the six months. Equity losses from joint ventures were $1,343 and $1,985, respectively. Comprehensive income attributable to FRP was $5,546 for the quarter and $6,038 for the six months.
Balance Sheet, Debt and Liquidity
- At June 30, 2020, total assets were $534,117, including net real estate investments of $366,319, investments available for sale of $130,058 and cash and cash equivalents of $30,742. Cash plus investments available for sale totaled approximately $160,800.
- Total liabilities were $148,316 and total equity was $385,801. Secured notes payable were $88,993, consisting primarily of the Dock 79 permanent loan.
- The Wells Fargo revolving credit facility had a $20,000 maximum capacity, no borrowings, $411 in letters of credit and $19,589 available borrowing capacity. The company was in compliance with its covenants.
- Six-month investing cash flow was $7,787, including $5,867 of asset-sale proceeds and net proceeds from sales of available-for-sale investments. Financing cash flow was negative $12,762, primarily due to $12,354 of share repurchases.
- FRP repurchased 298,303 shares during the first six months at an average cost of $41.41 per share. The remaining repurchase authorization was $8,585 at June 30, 2020. The company pays no cash dividend.
Material Changes Versus Prior Comparable Period
- Q2 revenue declined 8.1% and six-month revenue declined 3.7%, driven by lower mining royalty revenue and lower stabilized joint venture lease revenue.
- Operating profit declined 42.9% in Q2 and 42.3% for the six months. Corporate expense increased 86.2% in Q2 and 85.0% for the six months, mainly from the timing of stock compensation grants.
- Mining royalty revenue declined 8.8% in Q2 and 5.7% for the six months because FRP no longer received double minimum payments at Lake Louisa after Cemex received its final mining permit.
- Stabilized joint venture operating profit declined 40.9% in Q2 and 11.4% for the six months. Dock 79 experienced rent freezes, reduced renewal economics and retail pressure, although occupancy remained above 90%.
- Development losses increased to $1,320 in Q2 and $2,806 for the six months, reflecting pre-leasing and construction-related costs, including losses at The Maren and Bryant Street.
- Continuing-operations income increased 34.7% in Q2 and 19.2% for the six months, primarily because of higher real estate-sale gains and lower interest expense. Reported net income and EPS fell sharply because 2019 included $6,776 of Q2 and $6,862 of six-month discontinued-operation income from a property sale.
- The company invested in or advanced several development projects. Joint venture investments totaled $159,779 at June 30, 2020, compared with $160,452 at December 31, 2019.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide formal earnings guidance. It expected approximately $37,800 of additional 2020 real estate development and joint venture capital expenditures, funded primarily from cash, investments, property sales and available credit.
- COVID-19 created risks to rent collections, rent concessions, lease renewals, construction schedules, permitting, mining activity and financing availability. Management was negotiating rent abatements and cash-flow adjustments with retail tenants.
- The Maren was approximately 98% complete, 45% leased and 23% occupied at quarter-end. Bryant Street was 67% complete and expected to be completed in the fourth quarter of 2021. Construction at 1800 Half Street was expected to begin in the third quarter of 2020.
- Dock 79 averaged 91.50% occupancy during Q2 and was 92.13% leased and 90.16% occupied at quarter-end. A Washington, D.C. rent freeze and reduced retail activity were expected to pressure results.
- One mining lessee represented 31.5% of consolidated revenue for the six months, creating tenant concentration risk. Mining activity is also exposed to construction cycles.
- FRP sold its fully leased 1801 62nd Street building in July 2020 for $12,300, producing a reported pre-tax gain of approximately $3,800. Proceeds were placed in a 1031 exchange fund.
- Management stated that litigation and other ordinary-course claims were not expected to materially affect consolidated results. A previously recorded environmental remediation liability was reduced to zero in 2020.
- The company had no variable-rate debt outstanding at June 30, 2020, so it did not perform an interest-rate sensitivity analysis.
Investor Verification Priorities
- Verify the sustainability of operating cash flow and recurring earnings excluding real estate-sale gains, investment gains and discontinued operations.
- Monitor COVID-19 effects on Dock 79 collections, retail tenants, rent renewals, occupancy and The Maren’s lease-up.
- Track construction completion, financing terms and stabilization for The Maren, Bryant Street, 1800 Half Street and Greenville projects.
- Assess exposure to the large mining lessee and the impact of the loss of Lake Louisa double-minimum payments.
- Reconcile consolidated debt and liquidity with debt held inside unconsolidated joint ventures, including approximately $125,290 of secured notes payable reported by major joint ventures.
- Evaluate the pace and funding of the planned $37,800 of remaining 2020 development expenditures and the effect of continued share repurchases on liquidity.