FRP Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
FRP Holdings is a real estate company focused on warehouse/office ownership and leasing, mining royalty lands, and land acquisition, entitlement and development. This unaudited Form 10-Q covers the three and six months ended June 30, 2017. The company changed its fiscal year-end from September 30 to December 31 effective January 1, 2017; prior-period comparisons are presented for the comparable June 30 periods.
Key financial metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Total revenue | $9.360 million | $9.243 million | $18.682 million | $18.858 million |
| Operating profit | $3.986 million | $1.966 million | $7.390 million | $5.475 million |
| Income before taxes | $2.809 million | $1.279 million | $5.194 million | $4.288 million |
| Net income | $1.713 million | $0.774 million | $3.156 million | $2.594 million |
| Diluted EPS | $0.17 | $0.08 | $0.32 | $0.26 |
| Net cash from operations | Not separately provided | Not separately provided | $8.986 million | $7.852 million |
Operating margin was approximately 42.6% for the quarter and 39.6% for the first six months, compared with approximately 21.3% and 29.0%, respectively, in the prior comparable periods. The improvement primarily reflects the absence of the $2.0 million environmental remediation expense recorded in 2016.
- June 30, 2017 total assets were $271.210 million and shareholders’ equity was $204.486 million.
- Net real estate investments were $257.507 million, up from $254.324 million at December 31, 2016.
- Total debt, including revolving credit borrowings and mortgage notes, was $38.262 million at June 30, 2017, compared with $40.745 million at December 31, 2016.
- Cash and cash equivalents were reported as zero at June 30, 2017; the filing does not provide a clear explanation of the absence of reported cash.
- Capital expenditures were $8.139 million in the first six months, primarily for property investments, compared with $2.430 million in the prior period.
Material changes versus the prior comparable period
- Second-quarter revenue increased 1.3%, while six-month revenue declined 0.9%. Rental revenue rose 2.3% for the quarter and 2.7% for the six months.
- Mining royalty and rent revenue declined 11.0% for the quarter and 6.4% for the six months, reflecting lower production at several locations, excessive rainfall at Tyrone, and depletion of proven reserves at Lake Sand.
- Operating profit increased 102.7% for the quarter and 35.0% for the six months, principally because the prior-year periods included a $2.0 million environmental remediation charge.
- Equity in losses of joint ventures increased to $0.806 million for the quarter and $1.577 million for the six months, largely because of lease-up costs, depreciation and interest at the RiverFront Dock 79 project.
- Asset Management revenue was $14.479 million for the six months, essentially flat year over year. Occupied space increased to 3.459 million square feet from 3.320 million, but overall occupancy declined to 86.8% from 88.0%.
- Land Development and Construction remained loss-making, with an operating loss of $1.503 million for the six months, although the loss improved from $3.854 million because of the prior-year remediation charge.
Liquidity, debt and cash flow
- Operating cash flow was $8.986 million for the first six months. Investing activities used $8.375 million, and financing activities used $0.611 million.
- The Wells Fargo revolver had $5.733 million outstanding, $2.266 million of letters of credit, and $12.001 million available at June 30, 2017.
- The First Tennessee secured revolver had $0.622 million outstanding and $19.378 million available. The company expected to close an additional $20 million First Tennessee term loan during 2017.
- The company was in compliance with all debt covenants at June 30, 2017. The Wells Fargo agreement requires minimum tangible net worth of $110 million.
- Management expected approximately $19.6 million of 2017 capital expenditures, with $8.139 million incurred through June 30, funded primarily by operating cash flow, property sales and borrowings.
- The company does not pay cash dividends. It repurchased 2,000 shares during the six months and had $4.883 million remaining under its repurchase authorization.
Guidance, outlook, risks and unusual items
- Management expected Vulcan’s newly permitted Fort Myers mining operation to begin contributing more significantly after prepaid royalties are absorbed.
- The company expected formal approval of the RiverFront Phase II planned unit development in the third quarter of 2017 and anticipated beginning construction in the fourth quarter of 2017 or first quarter of 2018.
- RiverFront Dock 79 reached stabilization in July 2017, defined as 90% of apartments leased and occupied. Beginning July 1, 2017, FRP became the primary beneficiary and expects to consolidate the joint venture.
- The anticipated consolidation was expected to increase net assets by approximately $139 million, liabilities by approximately $93 million and equity by approximately $46 million, including an estimated gain of $20 million to $25 million. Final amounts were subject to fair-value determinations.
- FRP was evaluating a potential REIT election for 2017 but had made no final decision. A REIT election could require distributions equal to at least 90% of REIT taxable income and a potential accumulated earnings and profits distribution; the amount and composition had not been determined.
- Key risks include real estate vacancies and tenant defaults, construction and entitlement risk, mining-cycle exposure, interest-rate changes, refinancing and liquidity risk, environmental liabilities, joint-venture performance, debt covenant restrictions, cybersecurity, and the uncertain costs and benefits of a REIT conversion.
- The company has a capped obligation of approximately $1.871 million for contaminated-material handling at RiverFront Phase I and recorded a $2.0 million estimated remediation liability for Phase II. Actual costs could be materially higher or lower.
- One mining lessee generated 15.7% of consolidated revenue during the first six months, and one Asset Management tenant generated 11% of second-quarter consolidated revenue, creating concentration risk.
Investor verification points
- Verify the final accounting and fair-value impact of consolidating RiverFront Dock 79 beginning July 1, 2017, including the estimated $20 million to $25 million gain.
- Assess whether mining royalty declines, particularly at Lake Sand, are temporary or reflect permanent reserve depletion and reduced production capacity.
- Monitor occupancy, lease-up and operating performance of Dock 79 and the newly completed Patriot Business Center building.
- Confirm the timing, collateral and final terms of the proposed $20 million First Tennessee term loan.
- Evaluate the company’s ultimate REIT election decision, required distributions and potential accumulated earnings and profits distribution.
- Reconcile the reported zero cash balance with liquidity disclosures and revolving-credit availability.
- Review environmental remediation obligations, joint-venture debt and the potential effects of tenant and mining-lessee concentration.