FRP Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019; unaudited. FRP is a real estate company focused on mining royalty lands, development properties, commercial assets and a stabilized residential joint venture.
Business Context and Strategic Position
- The company completed the sale of its remaining excluded industrial warehouse property on June 28, 2019 for $11.7 million. Most of the former warehouse portfolio remains classified as discontinued operations.
- Continuing operations are increasingly concentrated in mining royalties, development joint ventures and Dock 79, a 305-unit residential property in which FRP owns 66%.
- FRP owns approximately 15,000 acres of mining royalty lands, primarily in Florida and Georgia, with estimated remaining reserves of 528 million tons as of December 31, 2018.
Financial Performance and Key Metrics
| ($ in thousands, except per-share data) | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | 6,363 | 5,553 | 12,077 | 10,628 |
| Operating profit | 2,107 | (456) | 3,462 | (359) |
| Income from continuing operations | 2,952 | (879) | 4,593 | (1,572) |
| Income from discontinued operations | 6,776 | 120,465 | 6,862 | 122,187 |
| Net income attributable to FRP | 9,825 | 119,982 | 11,723 | 121,542 |
| Diluted EPS | $0.99 | $11.87 | $1.17 | $12.04 |
- Revenue increased 14.6% in the quarter and 13.6% for the six-month period, primarily from higher mining royalty revenue and lease revenue.
- Continuing-operations operating margin was approximately 33.1% in Q2 2019 versus negative 8.2% in Q2 2018; the six-month margin was approximately 28.7% versus negative 3.4%.
- Mining royalty revenue increased 28.1% in Q2 and 27.0% for the first six months. Management attributed the increase principally to higher activity at the Fort Myers quarry.
- Dock 79 generated Q2 lease revenue of $2.752 million and operating profit of $602,000. Average occupancy was 96.37%; at June 30, residential units were 94.44% occupied and 97.38% leased, while retail was 76% leased.
- Net operating income, a non-GAAP measure, was $9.021 million for the first six months, compared with $7.528 million in the prior-year period.
Cash Flow, Balance Sheet, Debt and Liquidity
- At June 30, 2019, total assets were $535.1 million, total liabilities were $144.1 million and total equity was $391.0 million.
- Balance-sheet cash and cash equivalents were $56.2 million, with an additional $20.1 million held in escrow. Management reported $76.2 million of cash and cash equivalents plus escrow in its liquidity discussion.
- Investments available for sale totaled $122.2 million. The portfolio consisted of 41 corporate bonds with maturities from 2020 through 2022; the unrealized gain was $1.606 million.
- Six-month operating cash flow was $8.161 million, investing cash flow was $31.138 million and financing cash flow was negative $5.677 million. Cash increased $33.622 million to $56.169 million.
- Secured notes payable totaled $88.857 million, consisting principally of the Dock 79 permanent loan. The loan bears fixed interest at 4.125% and is non-recourse to FRP, subject to customary carve-out provisions.
- FRP had no borrowings under its $20 million Wells Fargo revolving facility, $1.710 million of outstanding letters of credit and $18.290 million available for borrowing. The company was in compliance with its covenants.
- The company repurchased 110,527 shares during the first six months at an average cost of $48.06 per share. It does not pay cash dividends.
Material Changes Versus the Prior Comparable Period
- Continuing operations improved from a Q2 2018 loss of $879,000 to Q2 2019 income of $2.952 million, reflecting higher revenue, lower depreciation and corporate expenses, lower interest expense and investment income.
- Net income declined sharply because Q2 2018 included $120.465 million of discontinued-operation income from the prior warehouse portfolio sale, while Q2 2019 included only $6.776 million, primarily from the sale of the remaining 1502 Quarry Drive property.
- Net investment income increased to $1.984 million in Q2 and $3.794 million for the first six months, including realized investment gains of $328,000 and $447,000, respectively.
- Equity-method losses from joint ventures increased to $536,000 for the first six months, reflecting continued investment and construction activity.
- Investments in joint ventures increased from $88.9 million at December 31, 2018 to $94.9 million at June 30, 2019, principally reflecting additional funding for RiverFront Holdings II and other development ventures.
Guidance, Outlook, Risks and Unusual Items
- Management expects approximately $11.7 million of additional 2019 capital expenditures for real estate development and joint ventures, funded primarily with cash, investments, operating cash flow, property-sale proceeds or credit facilities.
- FRP is reviewing at least $6 million of additional opportunities to complete an open Section 1031 exchange. It also placed $50 million into two opportunity zone funds; qualifying investments must generally be deployed within 31 months.
- The Maren project is expected to be delivered in the first half of 2020. Bryant Street construction is expected to be completed in 2021, with initial residential deliveries anticipated by the end of 2020.
- Management reported a fifth consecutive quarter of year-over-year mining royalty revenue growth and described the first six months as the segment’s strongest six-month start to a fiscal year.
- Subsequent to quarter-end, Cemex received the final mine operating permit for the company’s Lake Louisa property. Cemex expects to begin meaningful mining and sales by the first quarter of 2021, subject to completing required road construction.
- Key risks include construction and development costs, zoning and entitlement delays, apartment demand and vacancies, lease renewals, tenant defaults, mining-cycle exposure, interest rates, capital-market conditions, environmental liabilities and reliance on major mining tenants. One mining lessee represented 31% of consolidated revenue for the first six months.
- The company has commitments and contingent exposure related to development joint ventures, preferred equity funding, letters of credit, environmental matters and project-level debt. Management stated that existing litigation and claims are not expected to have a material adverse effect.
- The financial statements reflect adoption of the new lease standard effective January 1, 2019; management reported no material impact.
Important Facts for Investors to Verify
- Reconcile reported cash of $56.2 million with management’s $76.2 million liquidity figure, including escrow balances.
- Assess the sustainability of mining royalty growth and the concentration represented by the major mining lessee.
- Monitor leasing and occupancy at Cranberry Run, 1801 62nd Street, Windlass Run, The Maren and Bryant Street.
- Review funding requirements, construction progress, extension conditions and interest-rate exposure for the development joint ventures.
- Separate recurring operating performance from discontinued-operation gains, property-sale gains and investment gains.
- Verify the expected tax and deployment consequences of the $50 million opportunity zone investment and outstanding Section 1031 exchange requirements.
- Track share repurchases, remaining authorization and the company’s stated policy of paying no cash dividends.