Business Context and Reporting Period
FRP Holdings, Inc. is a real estate company focused on mining royalty lands, land development and construction, residential apartments, and warehouse/office properties. This unaudited Form 10-Q covers the three and six months ended June 30, 2018.
On May 21, 2018, FRP sold 40 industrial warehouse properties and three land parcels to an affiliate of Blackstone for $347.2 million. One property valued at $11.7 million was excluded after the tenant exercised its purchase right. The sold assets are presented as discontinued operations.
Financial Performance and Key Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $5.553 million, up 104.2% | $10.628 million, up 98.5% |
| Operating profit (loss) | $(0.456) million | $(0.359) million |
| Income (loss) from continuing operations | $(0.879) million | $(1.572) million |
| Income from discontinued operations, net | $120.465 million | $122.187 million |
| Net income attributable to FRP | $119.982 million | $121.542 million |
| Diluted earnings per share | $11.87 | $12.04 |
Continuing-operations operating margins were approximately negative 8.2% for the quarter and negative 3.4% for the six-month period. Net earnings and reported margins were dominated by the $164.807 million pretax gain on the warehouse-property sale, which produced $120.465 million of second-quarter after-tax discontinued-operation income.
- Continuing-operations revenue increased primarily because Dock 79 was consolidated beginning July 1, 2017. Six-month rental revenue rose to $6.497 million from $1.507 million.
- Mining royalty and rent revenue increased 12.4% in the quarter and 6.6% for the first six months. Mining royalty lands generated six-month operating profit of $3.407 million, an 89.0% margin.
- RiverFront on the Anacostia generated $5.038 million of six-month revenue but a $1.244 million operating loss, mainly reflecting $4.065 million of depreciation and amortization.
- Net operating income, a non-GAAP measure, was $7.528 million for the first six months versus $4.447 million in the prior-year period.
Cash Flow, Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $32.849 million at June 30, 2018, compared with $4.524 million at December 31, 2017. Cash held in escrow was $278.573 million, resulting in total cash items of approximately $311.422 million.
- Six-month net cash provided by operating activities was $7.015 million, including $3.250 million from continuing operations and $3.765 million from discontinued operations.
- Net cash provided by investing activities was $51.678 million, reflecting sale proceeds partly offset by $278.240 million placed in escrow and $4.671 million invested in joint ventures.
- Net cash used in financing activities was $30.368 million, primarily due to repayment of debt associated with the sold properties.
- Total debt was $88.720 million at June 30, 2018, down from $118.317 million at year-end 2017. The remaining debt is primarily the fixed-rate, non-recourse Dock 79 loan at 4.125%.
- The $20 million Wells Fargo revolver had no borrowings, $2.202 million of outstanding letters of credit, and $17.798 million available capacity. FRP was in compliance with its debt covenants.
- Total assets were $549.944 million and total equity was $386.379 million at June 30, 2018. Shareholders’ equity was $366.764 million, including retained earnings of $308.397 million.
Material Changes Versus the Prior Comparable Period
- The industrial warehouse portfolio sale materially changed FRP’s asset mix, earnings profile, liquidity, and continuing operations. Most of the Asset Management portfolio is now discontinued, leaving three office buildings.
- Second-quarter continuing-operations revenue doubled, but operating results declined to a loss because cost of operations increased 247.5%, including higher depreciation, operating expenses, and corporate expenses.
- Continuing-operations results included $1.085 million of stock compensation expense, consisting primarily of the annual director grant and accelerated vesting of executive options triggered by the asset disposition.
- Dock 79 was consolidated for a full comparative period in 2018, whereas its prior-year results were primarily reflected through equity in loss of joint ventures.
- FRP formed RiverFront Holdings II in May 2018 to develop Phase II of RiverFront. FRP contributed land valued at $16.3 million and $4.6 million of cash; the project has construction financing capacity of up to $71 million.
Guidance, Outlook, Risks and Unusual Items
- Management expects to deliver RiverFront Phase II, known as The Maren, in the first half of 2020. A 94,350-square-foot Hollander Business Park building is expected to come online in the second quarter of 2019.
- Management is evaluating reinvestment opportunities for the sale proceeds and stated that it may remain patient rather than deploy capital at unfavorable valuations.
- Expected 2018 capital expenditures are approximately $10.156 million, of which $3.252 million had been spent by June 30, 2018. The company does not currently pay cash dividends.
- Dock 79 averaged 94.7% occupancy during the first six months and was 95.1% leased and 97.4% occupied at quarter-end. Six-month lease renewals were 60.2%, with an average rent increase of 3.6%.
- Key risks include cyclical construction activity affecting mining royalties, real estate development and entitlement risk, vacancies and lease renewals, interest-rate and capital-market conditions, the ability to reinvest sale proceeds, project financing and execution, environmental liabilities, tenant defaults, joint-venture risks, and restrictions under credit agreements.
- The company recorded a $1.807 million environmental remediation liability at June 30, 2018. Management stated that litigation and other claims were not expected to have a material adverse effect, but actual Phase II remediation costs could be materially higher or lower than recorded.
- One mining lessee represented 14% of consolidated revenue for the first six months; loss or termination of significant mining leases could materially affect results.
Investor Verification Items
- Verify the final cash availability and restrictions on the approximately $311.4 million of cash and escrow balances, including the timing and permitted uses of sale proceeds.
- Assess continuing-operations earnings power after removing the discontinued warehouse portfolio and the one-time sale gain.
- Review Dock 79 operating performance, debt-service requirements, noncontrolling interest, and the financing and construction budget for The Maren.
- Monitor the deployment of sale proceeds and whether future acquisitions or developments increase leverage or execution risk.
- Review environmental remediation exposure, development entitlements, joint-venture commitments, letters of credit, and concentration in major mining tenants.