FRP Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
FRP Holdings, Inc. owns, leases and manages warehouse/office properties, mining royalty lands, and land held for entitlement and development. Reported results cover the three months ended March 31, 2017, compared with the three months ended March 31, 2016. The Company changed its fiscal year-end from September 30 to December 31 effective January 1, 2017; the December 31, 2016 quarter was a transition period.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $9.322 million | $9.615 million | (3.0%) |
| Operating profit | $3.404 million | $3.509 million | (3.0%) |
| Operating margin | 36.5% | 36.5% | Stable |
| Income before taxes | $2.385 million | $3.009 million | (20.7%) |
| Net income | $1.443 million | $1.820 million | (20.7%) |
| Basic/diluted EPS | $0.15/$0.14 | $0.18/$0.18 | Down |
| Net margin | 15.5% | 18.9% | Down |
| Cash flow from operations | $4.882 million | $3.289 million | +$1.593 million |
| Capital expenditures | $3.729 million | $0.956 million | +$2.773 million |
At March 31, 2017, total assets were $269.517 million, including $255.637 million of net real estate investments. Cash and cash equivalents were $106,000. Total liabilities were $68.425 million and shareholders’ equity was $201.092 million.
Total debt, including the revolving facility and secured notes, was $39.749 million, compared with $40.745 million at December 31, 2016. Current secured debt was $4.599 million. The Wells Fargo revolver had $5.799 million outstanding, $2.263 million in letters of credit and $11.938 million available. The First Tennessee revolver had $966,000 outstanding and $19.034 million available. The Company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Rental revenue increased 3.2% to $6.283 million, while mining royalty and rent revenue declined 1.0% to $1.739 million.
- Reimbursement revenue fell 26.6% to $1.300 million, primarily because of lower snow-removal reimbursements from a milder winter. The related expense reduction was substantially a pass-through benefit.
- Asset Management revenue declined 3.8% because of lower reimbursements, but cash-basis net operating income increased 4.5% to $5.689 million. Occupied square feet increased 5.3% to 3.525 million, and occupancy was 90.8% versus 90.7%.
- Equity in losses of joint ventures increased to $771,000 from $86,000, primarily because RiverFront Phase I incurred operating losses and depreciation during lease-up. This was the principal driver of the net-income decline.
- Corporate expenses increased 31.6% to $1.327 million, reflecting $191,000 of stock-option modification expense related to the former CEO’s departure and higher audit costs associated with the fiscal-year change.
- Operating cash flow increased despite lower net income, aided by a $3.092 million increase in deferred tax liabilities, primarily related to bonus depreciation on RiverFront Phase I.
- Investing cash use increased to $3.833 million, primarily because of higher property investment. Financing cash use decreased to $943,000, reflecting higher revolving-facility borrowings.
Guidance, Outlook, Risks and Unusual Items
- Management expects approximately $19.6 million of 2017 capital expenditures for real estate development and acquisitions; $3.729 million had been spent through March 31.
- The Company expects to close a further $20 million First Tennessee secured term loan during 2017 to support construction and acquisitions.
- Management expects RiverFront Phase I to reach residential stabilization in the third quarter of 2017. As of April 23, residential units were 71% occupied and 79% leased; retail was 80% leased.
- Phase II of RiverFront received a favorable 5-0 zoning vote, with formal approval anticipated in the second quarter and groundbreaking expected in late 2017 or early 2018, subject to approvals and other conditions.
- The Company is considering a REIT election for 2017 but has made no final decision. A 2017 election could require at least 90% distribution of REIT taxable income and a special distribution of accumulated C-corporation earnings and profits. The amount and composition of any such distribution have not been determined.
- The Company does not pay cash dividends and has no present intention to do so, although a REIT election could materially change future distribution requirements.
- Near-term leasing risk includes 357,175 square feet of lease expirations in the quarter ending June 30, 2017; 129,891 square feet had renewed as of the filing.
- RiverFront Phase I contains contaminated material. The Company agreed to bear up to $1.871 million of Phase I handling costs and estimated total remediation costs at approximately $1.9 million. Additional environmental costs could be higher or lower than recorded.
- Mining royalty revenue is exposed to construction activity and production volumes. Vulcan’s Lake Sand reserves are depleted unless additional tenant capital is invested, while a newly issued Ft. Myers mining permit may allow production to begin and could increase future royalties.
- Variable-rate debt creates interest-rate exposure. Management estimated that a one-percentage-point increase in applicable rates would increase next-12-month interest expense by approximately $58,000 based on March 31 borrowings.
- CEO Thompson S. Baker resigned in March 2017 and was succeeded by John D. Baker II. The related option vesting resulted in additional stock-compensation expense.
Important Facts for Investors to Verify
- Progress toward RiverFront Phase I stabilization, refinancing of its nonrecourse construction loan, and formation and financing of Phase II.
- Whether the Company elects REIT status and the resulting amount, timing, tax treatment and funding of any required special or regular distributions.
- Execution of the anticipated $20 million First Tennessee term loan and continued compliance with Wells Fargo and other debt covenants.
- Lease renewals and occupancy trends, especially the June 30, 2017 expiration schedule.
- Actual remediation costs and potential recoveries related to RiverFront contamination and other environmental contingencies.
- Production commencement and royalty economics at the newly permitted Ft. Myers mining property, as well as continued weakness or depletion at Lake Sand.
- The sustainability of operating cash flow after excluding favorable deferred-tax and working-capital effects, relative to planned capital expenditures.