FRP Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019; filed November 8, 2019. Amounts are in thousands unless otherwise stated.
Business context
FRP Holdings is a real estate company focused on mining royalty lands, property development, commercial property ownership and management, and stabilized joint ventures, including the Dock 79 apartment project. Following the 2018 sale of most industrial warehouse properties, those assets are reported as discontinued operations. The remaining excluded property was sold in June 2019 for $11.7 million.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $5,883 | $5,742 | $17,960 | $16,370 |
| Operating profit | $1,358 | $1,668 | $4,820 | $1,309 |
| Income from continuing operations | $1,902 | $2,030 | $6,495 | $458 |
| Net income attributable to FRP | $2,001 | $2,224 | $13,724 | $123,766 |
| Diluted EPS | $0.20 | $0.22 | $1.38 | $12.24 |
- Q3 operating margin was approximately 23.1%, compared with 29.1% in the prior-year quarter. Nine-month operating margin was approximately 26.8%, compared with 8.0% in 2018.
- Q3 mining royalty revenue increased 8.3% to $2,302; nine-month mining royalty revenue increased 20.4% to $7,164. Management attributed the increase primarily to higher production at the Fort Myers quarry.
- Nine-month lease revenue increased 3.6% to $10,796. Stabilized joint venture revenue increased 5.3% to $8,171, and segment operating profit increased to $1,541 from a $1,204 loss.
- Nine-month net investment income was $5,813, including $591 of realized gains on available-for-sale investments. The company held 40 corporate bonds with a September 30 fair value of $115,308 and an unrealized gain of $1,539.
- Cash flow from operations was $15,021 for the first nine months, versus cash used of $41,660 in the prior-year period. Continuing operations generated $16,777, partly reflecting deferred taxes related to 1031 exchanges and opportunity-zone investments.
- Investing activities generated $40,131, including $89,260 of proceeds from investment sales, offset by $36,941 of purchases of investments, $16,226 of joint-venture investments, and $9,360 of property investments.
- Financing activities used $8,453, including $7,714 for share repurchases. Cash increased by $46,699 to $69,246.
- September 30 assets were $536,297, including $314,768 of net real estate investments, $103,822 of joint-venture investments, $69,246 of cash, and $115,308 of investments available for sale. Total equity was $390,214.
- Secured notes payable were $88,891, substantially unchanged from December 31, 2018. The debt primarily represents the Dock 79 permanent loan, which bears fixed interest at 4.125% and is non-recourse to the company except for customary carve-outs.
- The company had no borrowings under its $20,000 revolving credit facility, $958 of outstanding letters of credit, and $19,042 available for borrowing. Management stated that all covenants were satisfied.
Material changes versus prior comparable periods
- Q3 revenue rose 2.5%, but operating profit declined 18.6% and net income attributable to FRP declined 10.0%, primarily because of lower Asset Management results, increased corporate allocations, and higher joint-venture losses.
- Nine-month continuing-operations income increased substantially to $6,495 from $458, while total net income attributable to FRP fell 88.9% because 2018 included $122,109 of discontinued-operations income from the major property sale.
- Nine-month operating profit improved by $3,511, supported by lower depreciation and amortization, reduced corporate expense, stronger mining royalties, and improved stabilized joint-venture results.
- Asset Management generated a nine-month operating loss of $237 versus a $637 profit in 2018. Cranberry Run was only 26.1% leased and occupied at quarter-end; 1801 62nd Street was 100% leased and expected to be fully occupied in the first quarter of 2020.
- FRP repurchased 159,282 shares during the first nine months at an average cost of $48.43 per share. The remaining repurchase authorization was $11,436.
- The company invested $6,000 in a 26.649% beneficial interest in the Hickory Creek apartment DST through a like-kind exchange and continued funding major development joint ventures, including RiverFront Phase II and Bryant Street.
Guidance, outlook, risks and unusual items
- Management expects approximately $10,500 of additional 2019 capital expenditures for real estate development and joint ventures, funded primarily from cash, investments, operating cash flow, property sales, or credit facilities.
- The Maren construction remained on schedule, with delivery expected in the first half of 2020. Bryant Street construction was expected to finish in 2021, with the first residential units potentially delivered by the end of 2020.
- Management intends to redeploy proceeds from asset sales selectively, emphasizing investment returns rather than speed of deployment. No cash dividends are currently paid.
- Two opportunity-zone funds totaling $50,000 were formed in June 2019. If suitable investments are identified, the funds must generally be deployed into qualified opportunity-zone investments within 31 months.
- Key risks include construction and development execution, zoning and entitlement delays, real estate market conditions, apartment demand, vacancies, lease renewals, tenant defaults, interest-rate and capital-market conditions, environmental liabilities, joint-venture performance, and restrictions under the credit agreement.
- One mining lessee represented 31% of consolidated revenue for the nine months; termination of the related leases could materially affect results.
- The company has commitments and contingencies related to development financing, letters of credit, joint-venture guarantees, environmental matters, litigation, and self-insurance. Management does not expect current litigation or claims to have a material adverse effect, but outcomes remain uncertain.
- The quarter included a $124 gain on the sale of Yatesville, Georgia land, $144 of realized bond gains, $255 of Bryant Street guarantee-liability amortization, and $560 of preferred interest from Bryant Street and The Maren.
Important facts for investors to verify
- Confirm the reconciliation of continuing operations to discontinued operations when assessing year-over-year earnings, particularly the unusually large 2018 property-sale gain.
- Monitor mining royalty volumes, the Fort Myers quarry ramp-up, the Manassas volumetric adjustment, and concentration among the company’s five mining tenants.
- Track occupancy, leasing costs, and capital requirements at Cranberry Run and 1801 62nd Street.
- Verify construction schedules, total funding needs, financing terms, guarantees, and lease-up assumptions for The Maren, Bryant Street, Windlass Run, and other joint ventures.
- Assess the liquidity impact and investment deadline for the $50,000 opportunity-zone funds and the planned $10,500 of remaining 2019 capital expenditures.
- Review the fair value, maturity profile, credit quality, and realized or unrealized gains of the $115,308 available-for-sale bond portfolio.
- Confirm compliance with revolving-credit covenants and the effect of the $217,000 dividend restriction stated in the filing.