FRP Holdings, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2022; filed November 14, 2022. Financial statements are unaudited and amounts are in thousands unless otherwise stated.
Business context
FRP Holdings is a real estate investment, development and operating company with four reportable segments: asset management, mining royalty lands, development, and stabilized joint ventures. Its portfolio includes industrial and office properties, mining royalty land, apartments, mixed-use developments and investments in unconsolidated joint ventures across the Mid-Atlantic and southeastern United States.
Key financial metrics
| Metric | Three months ended September 30, 2022 | Three months ended September 30, 2021 | Nine months ended September 30, 2022 | Nine months ended September 30, 2021 |
|---|---|---|---|---|
| Total revenue | $9,294 | $8,473 | $27,629 | $22,821 |
| Operating profit | $1,849 | $732 | $5,279 | $2,015 |
| Net income | $384 | $(113) | $1,370 | $41,043 |
| Net income attributable to FRP | $480 | $352 | $1,809 | $28,807 |
| Basic/diluted EPS | $0.05/$0.05 | $0.04/$0.04 | $0.19/$0.19 | $3.08/$3.07 |
| Net cash from operating activities | Not presented | Not presented | $13,175 | $16,400 |
Implied operating margin was approximately 19.9% in the third quarter and 19.1% for the first nine months. Net income attributable to FRP represented approximately 5.2% and 6.5% of revenue, respectively.
- Revenue drivers: Third-quarter lease revenue increased 9.6% to $6,823, while mining lands lease revenue increased 9.9% to $2,471. For the first nine months, lease revenue rose 27.1% and mining lands revenue rose 8.1%.
- Pro-rata NOI: Management reported third-quarter pro-rata NOI of $6.24 million, up 41.6%, and nine-month pro-rata NOI of $17.97 million, up 32.1%.
- Liquidity: Cash and cash equivalents were $144,783 at September 30, 2022, compared with $161,521 at December 31, 2021. The company also held $137,852 of U.S. Treasury notes maturing from late 2022 through 2024.
- Debt: Secured notes payable were $178,520, consisting principally of fixed-rate mortgage loans with a 3.03% rate and maturity on April 1, 2033. The company had no borrowings under its $20 million revolving credit facility, $506 of letters of credit outstanding and $19,494 available to borrow.
- Capital expenditures and investments: Nine-month investments in properties were $26,137, including $13,927 in development and $11,218 in mining royalty lands. Investments in joint ventures were $20,838, partially offset by $13,327 of returned joint-venture capital.
- Balance sheet: Total assets were $676,990 and total equity was $424,685 at September 30, 2022. Net real estate investments were $526,250.
Material changes versus the prior comparable period
- Third-quarter operating profit increased 152.6% to $1,849, primarily reflecting higher revenue, lower depreciation and improved stabilized-joint-venture performance.
- Nine-month operating profit increased 162.0% to $5,279, but net income attributable to FRP fell 93.7% because the prior-year period included a $51,139 gain from remeasurement of The Maren investment upon consolidation.
- The stabilized joint venture segment generated third-quarter operating profit of $906 versus a $495 loss in the prior-year quarter. The Maren contributed additional consolidated revenue, and Riverside achieved stabilization during the quarter.
- Asset management revenue increased 51.1% in the third quarter and 40.0% for the nine-month period, supported by higher occupancy at Cranberry Run and the addition of Hollander Business Park buildings.
- Development remained loss-making, with operating losses of $1,322 in the third quarter and $3,958 for the first nine months, compared with losses of $730 and $2,468, respectively, in the prior periods.
- Operating cash flow declined to $13,175 from $16,400, while investing cash flow changed from $73,047 provided in 2021 to $28,209 used in 2022, primarily because of greater property and joint-venture investment and lower investment-sale proceeds.
Outlook, commentary, risks and unusual items
- Management expects approximately $12.2 million of additional real estate capital expenditures, including joint-venture investments, during the remainder of 2022. Funding is expected to come primarily from cash and investments, operating cash flow, property sales and potentially the revolving facility.
- Management expects completion of the final Hollander building shell by year-end 2022 and occupancy before the end of the first quarter of 2023. The building is expected to be subject to a 10-year build-to-suit lease.
- The Verge was in lease-up, .408 Jackson was approximately 98.6% complete with leasing expected to begin in the fourth quarter, and Bryant Street still required stabilization and permanent financing.
- After quarter-end, the Hickory Creek DST was sold for $8.83 million on a $6 million investment. FRP also entered an agreement with Steuart Investment Company and MRP for up to ten mixed-use projects in Washington, D.C.; the contemplated projects could ultimately include more than 3 million square feet, 3,000 residential units and 150,000 square feet of retail.
- FRP and MRP guaranteed $26 million of a Bryant Street construction loan, subject to an agreement limiting FRP’s guarantee to its proportionate ownership. Letters of credit of $506 were outstanding for development-related obligations.
- Key risks include real estate development and entitlement delays, construction costs, vacancies and lease renewals, tenant defaults, mining-sector and construction-market cyclicality, joint-venture losses, environmental liabilities, inflation, rising interest rates, financing and capital-market conditions, COVID-19 effects, cybersecurity and concentration among mining tenants. One mining lessee represented 22.5% of consolidated nine-month revenue.
- The company reported compliance with all debt covenants at September 30, 2022. Management stated that known litigation and environmental matters were not expected to have a material adverse effect, while noting that additional environmental liabilities cannot be ruled out.
- Unusual items included a $300 adjustment reducing mining royalties for prior overpayments at the Newberry property, $874 of gains on real estate sales for the first nine months, and $2,143 of unrealized losses on Treasury-note investments recorded in comprehensive income.
Important facts for investors to verify
- Confirm the timing, cost and leasing progress of The Verge, .408 Jackson, Bryant Street, Hollander and the planned 900,000-square-foot Mechanics Valley warehouse.
- Assess the effect of higher interest rates and construction costs on development budgets, joint-venture financing and future returns.
- Review the financial condition, debt and leasing performance of major joint ventures, particularly Bryant Street, 1800 Half Street and Greenville/Woodfield.
- Monitor the concentration of mining revenue and the effect of royalty-volume changes or tenant termination.
- Determine how the $8.83 million Hickory Creek sale proceeds and the post-quarter-end Washington, D.C. transaction affect liquidity, capital allocation and recurring earnings.
- Distinguish recurring operating performance from nonrecurring gains, fair-value effects, investment income and accounting changes related to The Maren’s consolidation.