FRP Holdings, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2018. The filing was signed November 8, 2018. FRP operates mining royalty lands, land development and construction projects, residential apartments, and a limited portfolio of office properties.
Key Financial Metrics
| Metric | Three months ended Sept. 30, 2018 | Three months ended Sept. 30, 2017 | Nine months ended Sept. 30, 2018 | Nine months ended Sept. 30, 2017 |
|---|---|---|---|---|
| Total revenue | $5.7 million | $5.0 million | $16.4 million | $10.4 million |
| Operating profit | $1.7 million | $(0.3) million | $1.3 million | $0.9 million |
| Income from continuing operations | $2.0 million | $43.6 million | $0.5 million | $43.4 million |
| Net income attributable to FRP | $2.2 million | $25.4 million | $123.8 million | $28.5 million |
| Diluted earnings per share | $0.22 | $2.52 | $12.24 | $2.84 |
| Net operating income | Source text does not provide a quarterly consolidated NOI total | Source text does not provide a quarterly consolidated NOI total | $12.2 million | $8.1 million |
Margins: Continuing-operations operating margin was approximately 29.1% for the quarter and 8.0% for the nine-month period. Net income attributable to FRP margin was approximately 38.7% for the quarter and 756.1% for the nine-month period, the latter heavily influenced by the property-sale gain classified in discontinued operations.
Balance sheet and liquidity: At September 30, 2018, total assets were $507.3 million, including $34.8 million of cash, $34.3 million of restricted cash in escrow, $191.3 million of investments available for sale, and $239.0 million of net real estate investments. Total equity was $388.4 million. Secured debt was $88.8 million, primarily the RiverFront permanent loan. The company had no borrowings under its $20.0 million revolver, $1.9 million of outstanding letters of credit, and $18.1 million available to borrow. FRP reported compliance with all debt covenants.
Cash flow: Nine-month cash flow from operating activities was $(41.7) million, including $(46.6) million from discontinued operations, primarily tax payments related to the property sale. Investing activities provided $101.9 million, reflecting sale proceeds partially offset by purchases of investments and development spending. Financing activities used $29.9 million. Cash increased by $30.3 million to $34.8 million.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 14.0% in the third quarter and 57.6% for the first nine months, primarily from RiverFront apartment revenue following consolidation of Dock 79 beginning July 1, 2017, and higher mining royalty revenue.
- Third-quarter operating profit improved to $1.7 million from a $0.3 million loss. Mining royalty lands operating profit increased 18.1% to $1.9 million, while RiverFront generated $40,000 of operating profit versus a $1.2 million loss.
- Net income attributable to FRP declined 91.2% in the quarter because the prior-year period included a $60.2 million non-taxable gain from remeasurement of the Dock 79 partnership. For the nine-month period, net income attributable to FRP increased 333.5% because 2018 included a $165.0 million gain on the sale of industrial properties.
- On May 21, 2018, FRP sold 40 industrial warehouse properties and three land parcels to a Blackstone affiliate for $347.2 million. These assets were reclassified as discontinued operations for all periods presented. One warehouse, valued at $11.7 million, was excluded because of a tenant’s asserted right of first refusal.
- Debt declined from $118.3 million at December 31, 2017 to $88.8 million at September 30, 2018 after repayment of mortgage notes associated with the property sale. The company also paid $3.4 million of prepayment penalties.
- FRP invested $191.9 million of amortized cost in 78 corporate bonds, with maturities from 2020 through 2024. Their carrying value and fair value were $191.3 million at quarter-end, producing a $0.6 million unrealized loss recorded in comprehensive income.
Outlook, Commentary, Risks and Unusual Items
- Management reported continuing strength in mining royalty revenue and described the first nine months as the segment’s highest revenue period for any year to date. Mining royalty revenue increased 19.2% in the quarter and 10.8% year to date.
- Dock 79 averaged 95.8% occupancy during the quarter and was 94.4% leased and 93.8% occupied at quarter-end. Management expects to deliver RiverFront Phase II, known as The Maren, in the first half of 2020.
- Management expects approximately $10.2 million of 2018 capital expenditures, with $7.6 million spent through September 30. Funding is expected from cash and investments, operating cash flow, property sales, or borrowings.
- FRP signed a letter of intent with MRP for the Bryant Street development in northeast Washington, D.C. FRP expects to contribute $35 million of common equity and $20 million to $25 million of preferred equity, subject to final agreements and project development.
- Management stated that proceeds from the property sale may be reinvested or returned to shareholders, but emphasized a disciplined and patient approach. No cash dividend was being paid, and $4.9 million remained authorized for potential share repurchases.
- Environmental remediation at RiverFront Phase II was substantially completed, reducing the related liability by $465,000 from the previously recorded $2.0 million estimate. Management stated that known litigation and claims were not expected to have a material adverse effect, but a warehouse tenant is suing to enforce its asserted right of first refusal and seek roof-related costs or damages.
- Key risks include construction and development execution, zoning and entitlement approvals, apartment demand and occupancy, mining activity and tenant concentration, interest rates, financing availability, environmental liabilities, real estate market conditions, partner and tenant defaults, and the ability to redeploy sale proceeds effectively.
Important Facts for Investors to Verify
- Confirm the final resolution and economic impact of the tenant’s $11.7 million right-of-first-refusal litigation.
- Assess the sustainability of post-sale recurring revenue and earnings after the industrial warehouse portfolio disposition.
- Monitor deployment of the approximately $191 million bond portfolio and the timing and terms of reinvestment or shareholder distributions.
- Verify construction budgets, financing draws, completion timing, leasing progress, and required equity funding for RiverFront Phase II and the proposed Bryant Street project.
- Review mining tenant concentration, including one lessee contributing 17% of consolidated revenue for the first nine months, and the effect of construction-cycle changes on royalty volumes.
- Distinguish recurring operating performance from the $165.0 million property-sale gain and other discontinued-operation items when valuing the company.