FRP Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
FRP Holdings is a real estate company focused on warehouse/office ownership and leasing, mining royalty lands, land development and construction, and the RiverFront on the Anacostia project. This report covers the three and nine months ended September 30, 2017. The Company changed its fiscal year-end from September 30 to December 31, making this the third quarter of fiscal 2017.
Beginning July 1, 2017, the Company consolidated the RiverFront Investment Partners I, LLC partnership, including the Dock 79 apartment project, after the project reached stabilization and FRP became the accounting primary beneficiary.
Financial performance and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $12.1 million, up 23.3% | $30.7 million, up 7.3% |
| Operating profit | $2.8 million, down 34.4% | $10.2 million, up 4.4% |
| Net income attributable to FRP | $25.4 million, compared with $2.0 million | $28.5 million, compared with $4.6 million |
| Diluted earnings per share | $2.52, compared with $0.20 | $2.84, compared with $0.46 |
| Operating margin | 23.5%, compared with 44.1% | 33.2%, compared with 34.2% |
| Net cash provided by operating activities | $15.3 million, compared with $13.7 million | |
| Capital expenditures and property investments | $12.6 million, compared with $17.0 million |
Rental revenue increased 39.6% in the quarter and 15.3% year to date, primarily due to Dock 79 and growth in the asset management portfolio. Mining royalty and rent revenue declined 12.5% in the quarter and 8.5% year to date. Revenue reimbursements declined 4.9% year to date.
The quarter and year-to-date results include a $60.2 million gain on remeasurement of the Dock 79 investment at fair value. The gain included $20.5 million attributable to the noncontrolling interest and was the primary driver of reported earnings growth. It was non-cash and non-taxable, according to management.
Dock 79 contributed $2.4 million of rental and reimbursement revenue in the quarter and reported a $1.2 million operating loss, largely due to depreciation and amortization during lease-up. At September 30, the project was 96.4% leased and 95.4% occupied. Its first lease renewals produced a 53% renewal rate and an average rent increase of 3.89%.
Asset management revenue increased 3.5% in the quarter and 1.1% year to date. Cash-basis NOI was $5.6 million in the quarter, compared with $5.6 million, and $16.7 million year to date, compared with $16.6 million. Portfolio occupancy was 91.3% at September 30, compared with 89.9% a year earlier, with approximately 4.0 million square feet in the portfolio.
Land development and construction reported an operating loss of $0.6 million in the quarter and $2.1 million year to date. The year-to-date loss improved from $4.3 million primarily because 2016 included a $2.0 million environmental remediation expense. Mining royalty lands reported operating profit of $1.6 million in the quarter and $4.9 million year to date.
Balance sheet, debt and liquidity
- Total assets were $416.1 million at September 30, 2017, compared with $266.6 million at December 31, 2016, largely reflecting consolidation of Dock 79.
- Net real estate investments were $395.1 million, compared with $254.3 million.
- Cash and cash equivalents were $2.6 million; cash held in escrow was $0.2 million.
- Total debt was $115.1 million, compared with $40.7 million at December 31, 2016. Debt included $30.8 million of mortgage notes, $60.9 million of the RiverFront construction loan, $17.0 million of RiverFront EB5 financing, and $6.4 million of revolving credit borrowings.
- RiverFront construction and EB5 financing are non-recourse to FRP. The RiverFront construction loan had an initial maturity date in August 2018, subject to a potential four-year extension if specified conditions are satisfied.
- The Wells Fargo revolver had $5.7 million outstanding, $2.3 million of letters of credit, and $12.0 million available. The First Tennessee revolver had $0.8 million outstanding and $19.2 million available.
- The Company was in compliance with its debt covenants at September 30, 2017. The Wells Fargo facility includes a minimum $110 million tangible net worth covenant.
Material changes, outlook and risks
- The Dock 79 consolidation materially increased assets, debt, depreciation, amortization and rental revenue, and produced the $60.2 million fair-value remeasurement gain. Future earnings will include additional depreciation and lease-intangible amortization; management stated that approximately 89% of the lease-intangible value was expected to be expensed by June 30, 2018.
- Management expected to obtain permanent financing for Dock 79 and continue pre-development activities for RiverFront Phase II, with groundbreaking expected in the fourth quarter of 2017 or first quarter of 2018.
- The Company expected 2017 capital expenditures for real estate development and acquisitions of approximately $19.2 million, of which $12.6 million had been spent by September 30.
- The Company deferred its REIT election decision until 2018 because of proposed federal tax reform. It did not expect regular REIT distributions before 2019 at the earliest. Any election could require a taxable distribution of accumulated earnings and profits; the amount and form had not been determined.
- Mining royalty results remain exposed to construction activity, production volumes, weather, reserve depletion and tenant capital spending. One mining lessee represented 15.4% of consolidated revenue for the nine months.
- One tenant represented 11% of consolidated revenue in the quarter. Tenant vacancies, defaults, lease renewals and concentration risk could affect results.
- The Company has environmental remediation exposure at RiverFront. It recorded a $2.0 million estimated liability for Phase II and stated that actual costs could be materially higher or lower. A $2.0 million environmental remediation expense had been recorded in the prior-year period.
- The Company is exposed to variable interest rates. Management estimated that a 1% increase in the Wells Fargo borrowing rate would increase annual interest expense by approximately $57,000 based on outstanding borrowings at September 30.
- The filing identifies risks involving real estate development and entitlements, construction costs, liquidity and debt repayment, interest rates, competition, environmental liabilities, cybersecurity, joint ventures and potential REIT qualification.
Most important facts for investors to verify
- Whether Dock 79 lease-up, renewal rates and rental growth support sustainable cash NOI after the one-time fair-value gain is excluded.
- The maturity, refinancing and extension status of the RiverFront construction loan and EB5 financing.
- The amount and timing of any future REIT election, accumulated-earnings distribution and regular dividends.
- Actual environmental remediation costs and the status of claims involving RiverFront Phases II through IV.
- Mining royalty volumes, reserve depletion and the financial condition and lease status of major mining tenants.
- Progress, financing and entitlement approvals for RiverFront Phase II and the Windlass Run development.
- The effect of higher depreciation, amortization, interest expense and variable rates on recurring earnings and cash flow.