Business Context and Reporting Period
FRP Holdings, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended June 30, 2015. Following the January 30, 2015 spin-off of its transportation business into Patriot Transportation Holding, Inc., FRP operates as a pure real estate company with three reportable segments: Asset Management, Mining Royalty Land, and Land Development and Construction. Prior periods have been reclassified to present transportation as discontinued operations.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Nine Months Ended June 30 |
|---|---|---|
| Total revenue | $8.497 million, up 10.7% | $25.747 million, up 12.4% |
| Operating profit | $3.889 million, up 35.8% | $8.393 million, up 22.3% |
| Income from continuing operations | $2.047 million, up 16.7%; diluted EPS $0.21 | $4.022 million, up 4.8%; diluted EPS $0.41 |
| Net income | $2.047 million versus $3.485 million | $6.201 million versus $7.529 million |
| Operating margin | 45.8% versus 37.3% | 32.6% versus 29.9% |
- Quarterly revenue growth reflected higher rental revenue, royalty and rent revenue, and reimbursements. Rental revenue increased 6.8% and royalty and rents increased 25.0% year over year.
- Quarterly continuing-operations earnings benefited primarily from the third build-to-suit building at Patriot Business Park and improved mining volumes. Higher depreciation, non-reimbursed property taxes, interest expense, and joint-venture losses partially offset the improvement.
- Asset Management generated nine-month revenue of $20.596 million and operating profit of $9.862 million. Occupancy was 90.4% versus 89.5%, occupied square feet increased to 3.256 million, and retention success improved to 78% from 70%.
- Mining Royalty Land generated nine-month revenue of $4.414 million and operating profit of $3.967 million, supported by increased production volumes.
- Land Development and Construction generated nine-month revenue of $737,000 but reported an operating loss of $1.686 million, compared with a $1.003 million loss in the prior-year period, primarily because of higher property taxes and development-related costs.
- Nine-month net cash provided by operating activities was $13.177 million, including $8.193 million from continuing operations, versus $19.443 million in the prior-year period.
- Capital expenditures were $3.693 million for the first nine months, compared with $14.134 million in the prior-year period. Management expects approximately $7.275 million of fiscal 2015 real estate development capital expenditures.
- Cash and cash equivalents were $739,000 at June 30, 2015, compared with $1.013 million at September 30, 2014.
Debt, Liquidity, and Capital Resources
- Total debt was $49.875 million, consisting of $41.196 million of mortgage notes and $8.679 million outstanding under the revolving credit facility. The current portion of secured notes was $4.114 million.
- The new Wells Fargo revolver has a $20 million maximum capacity, including a $10 million letter-of-credit sublimit. At June 30, $2.610 million of letters of credit were outstanding and $8.711 million remained available for borrowing.
- The Company was in compliance with its loan covenants. A 1% increase in interest rates on the variable-rate revolver would increase annual interest expense by approximately $87,000 based on June 30 borrowings.
- Management expected to close a new $20 million secured revolver with First Tennessee Bank in the fourth quarter of fiscal 2015 and an additional $20 million secured term loan by the end of calendar 2015. These financings were described as commitments and expected transactions, not completed borrowings as of June 30.
- No shares were repurchased during the first nine months. The Board had authorized up to $5 million of future repurchases, and the Company paid no cash dividends.
Material Changes Versus the Prior Comparable Period
- The transportation business was spun off and is reported as discontinued operations. Discontinued operations contributed no income in the current quarter and $2.179 million for the first nine months, compared with $1.731 million and $3.692 million, respectively, in the prior-year periods.
- Continuing-operations performance improved, but total net income declined because the prior-year periods included transportation-business gains.
- Operating profit increased substantially despite higher depreciation, property taxes, management allocations, corporate expenses, and interest expense.
- Interest expense increased by $515,000 for the nine-month period, partly because less interest was capitalized after completion of construction at Patriot Business Park. The Company also recorded a $116,000 mortgage prepayment penalty and $15,000 of remaining deferred loan costs in interest expense.
- The Company adopted a new three-segment reporting structure beginning in fiscal 2015 and adjusted prior periods accordingly.
Outlook, Commentary, Risks, and Unusual Items
- Management expected near-term growth from the 80,000-square-foot Hollander Business Park warehouse under construction, a potential Section 1031 replacement-property acquisition using proceeds from the expected $11.188 million Windlass Run Phase II sale, and higher mining volumes.
- Windlass Run Phase II, with a June 30 book value of $4.791 million, was under contract for an expected closing on or before August 31, 2015. The filing does not confirm that the closing occurred.
- Riverfront Phase I construction was underway, with lease-up anticipated during the second half of calendar 2016 and throughout 2017. The project had non-recourse construction and EB5 financing, and FRP owned 76.91% of the joint venture.
- Environmental remediation at Riverfront Phase I had an estimated cost of $2.077 million as of June 30, 2015. FRP recorded an additional $100,000 liability and recognized $159,000 of its share of additional joint-venture remediation costs. Future phases may create additional exposure when construction begins, and recovery from a prior tenant remains uncertain.
- One mining lessee generated 65.0% of Mining Royalty Land segment revenue. Lease termination or nonperformance by this lessee could materially affect the segment.
- The business is exposed to construction cycles, economic conditions, interest rates, financing availability, competition, demand for Baltimore-Washington-Northern Virginia warehouse and office facilities, and zoning or entitlement requirements.
- Quarterly operating profit included $17,000 of non-recurring spin-off costs; nine-month results included $324,000 of such costs.
- The Company disclosed a prior-period classification error involving corporate overhead allocation. The error overstated continuing-operations income by $395,000 for each of the three- and six-month 2014 periods, but had no impact on consolidated results. Management concluded that disclosure controls were effective as of June 30, 2015.
Key Facts for Investors to Verify
- Whether the anticipated Windlass Run Phase II sale closed by August 31, 2015 and whether proceeds were reinvested through a Section 1031 exchange.
- Whether the proposed First Tennessee $20 million revolver and $20 million term loan were completed on the stated timetable and on what terms.
- Actual progress, total cost, financing, remediation exposure, and lease-up assumptions for Riverfront Phase I and future phases.
- Mining volume trends, the concentration and renewal status of the major mining lessee, and the timing of the anticipated Manassas and Fort Myers production increases.
- Liquidity after planned capital expenditures, development spending, debt repayments, and any acquisitions.
- The effect of discontinued operations and spin-off-related allocations when comparing current results with historical periods.