FRP Holdings, Inc. (NASDAQ:FRPH) Q4 2023 Earnings Call Transcript

FRP Holdings, Inc. (NASDAQ:FRPH) Q4 2023 Earnings Call Transcript March 7, 2024

FRP Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone, and welcome to today’s FRP Holdings, Inc. Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note, this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Chief Financial Officer, John Baker, III.

John Baker: Thank you, Madison. Good morning. I’m John Baker III, Chief Financial Officer and Treasurer of FRP Holdings. And with me today are David deVilliers, Jr., our President and Vice Chairman; John Milton, our Executive Vice President and General Counsel; John Koppenstein, our Chief Accounting Officer; and David deVilliers, III, our Executive Vice President. As a reminder, any statements on this call, which relate to the future are, by their nature, subject to risks and uncertainties that could cause actual results and events to differ materially from those indicated in such forward-looking statements. These risks and uncertainties are listed in our SEC filings. We have no obligation to revise or update any forward-looking statements, except as imposed by law as a result of future events or information.

To supplement the financial results presented in accordance with GAAP, FRP presents certain non-GAAP financial measures within the meaning of Regulation G formulated by the Securities and Exchange Commission. The non-GAAP financial measure referenced in this call is net operating income or NOI. FRP uses this non-GAAP financial measure, to analyze its operations and to monitor, assess and identify meaningful trends in its operating financial performance. This measure is not, and should not be viewed as a substitute for GAAP financial measures. To reconcile NOI to GAAP net income, please refer to the segment titled non-GAAP Financial Measures on Pages 12 and 13 of our most recent earnings release. Any reference to cap rates, asset values per share values or the analysis of the estimated value of our assets net of debt and liabilities are for illustrative purposes only as a reflection of how management views its various assets for purposes of informing management decisions and do not necessarily reflect the price that would be obtained upon the sale of the asset or the associated costs or tax liability.

Now for our financial highlights from the fourth quarter. Net income for the fourth quarter was $2.88 million or $0.30 per share versus $2.76 million or $0.29 per share in the same period last year. Net income for the fourth quarter of 2023 when compared to the previous year was impacted negatively by an increase of $879,000 in equity and loss of joint ventures as well as an increase in interest expense of $188,000 due to less capitalized interest. Net income was positively impacted by an increase in interest income of $423,000 from increased interest earned on cash equivalents as well as improved revenues from our Industrial and Commercial segment. Fourth quarter pro rata NOI for all segments was $7.55 million versus $6.26 million in the same period last year for an increase of 28.6%.

Net income for 2023 was $5.3 million or $0.56 per share versus $4.57 million or $0.48 per share in the same period last year. Fiscal year 2023 was positively impacted by an increase in revenues and profits in all four segments compared to 2022 and an increase in interest income of $5 — or excuse me, $5.42 million from cash and cash equivalents as well as our lending ventures compared to last year. These were offset by an increase of $6.22 million in equity in loss of joint ventures compared to the same period last year. As we lease up the Verge and 408 Jackson as well as an increase in the management company in direct expense of $553,000 and an increase in interest expense of $1.2 million. 2022 was also positively impacted by $874,000 in gain from property sales, which we did not repeat in 2023.

Revenue, operating profit, pro rata NOI and net income all experienced strong growth — pardon me, No. I apologize. Revenue, operating profit, pro rata NOI and net income all experienced strong growth this quarter and for the year-to-date. Compared to the fourth quarter of 2022, we grew revenues by 2.6% operating profit by 17.2% pro rata NOI by 20.6% and net income by 7.8%. For fiscal year 2023 compared to last year, these metrics grew by 10.7%, 46.3%, 24.8% and 16.1%, respectively. Yesterday, we posted to our website a brief slide show of financial highlights for the fourth quarter and fiscal year. For those who have not seen it, we are now publishing an estimated value of our assets net of debt and liabilities or analysis yielded per share value in the range of $69.14 to $77.58.

I will now turn the call over to David for his report. David?

David deVilliers: Thank you, John. And good day to those on the call. Allow me to provide some operational highlights on the fourth quarter results of the company. First of all, a little housekeeping. We’ve renamed two of our business segments to better describe the assets in the Asset Management has now become industrial commercial and stabilized joint ventures has become multifamily. So relative to our Industrial Commercial business segment, we currently maintain 9 buildings in-house, making up nearly 550,000 square feet, which are predominantly warehouses. At year-end, we enjoyed 95.6% occupancy throughout this part of the portfolio. Full occupancy at our three industrial buildings and Hollander Business Park in Baltimore, Maryland as well as rent growth on renewals at Cranberry Business Park in Harper County, Maryland, have helped lift the NOI to $1.17 million for the quarter, of 46.1% increase over the same period last year.

For the year, our $3.9 million in NOI for this segment represents an increase of $1.23 million or 46.2% over 2022. Moving on to the results of our Mining and Royalty business segment. This business segment saw total revenues for the quarter of $2.9 million, nearly flat versus $2.9 million in the same period last year. NOI in this segment was down $169,000 over the same period last year. However, NOI for the year was 11,720,199 versus $10,152,539 in ’22, an increase of 15.4%. In the multifamily segment, Dock 79 and Maren with its 569 apartments had average occupancies of 96.4% and 94.7%, respectively, for Q4 with all retail fully leased. Both projects enjoyed renewal success rates of 70% and 61%, respectively, for the quarter, with docking a 1.6% rental rate increase on renewals and Maren a 2.75% increase.

Average occupancies for all of 2023 for Dock and Maren were 95.6% and 94.36% respectively. Riverside, in Greenville, South Carolina, with its 200 apartments was 94.5% occupied at quarter end with 53% of its tenants renewing and an average increase in net rental rate of 2.04%. Average occupancy for Q4 was 95.21% and year-to-date, 94.51%. The company’s share to 2023 program NOI for this business segment was $8.1 million, including an $800,000 pro rata NOI from Riverside. Although we saw rent growth in all three properties, higher collection balances and operating expenses caused NOI to flatten year-over-year when you factor in the change in equity due to the tenant and common sale to the Stewart family at Dock and Maren at the end of 2022. In the Development segment, we engaged in several strategies in this segment, which we use to grow the business.

These strategies include our industrial and commercial, multifamily and principal capital source lending. These strategies have grown the portfolio from one apartment project in four commercial buildings since liquidating our legacy warehouse portfolio in mid-2018 and to over 750,000 square feet of commercial industrial products, 1,827 multifamily units and several land parcels capable of additional growth. Our industrial commercial strategy consists of ground-up development from properties that are acquired, developed, managed and, in most cases, own 100% by FRP and transferred from development to the industrial and commercial business segment when the shell buildings are complete. We currently have three projects in our industrial pipeline in various stages of development.

During the second quarter, we broke ground on the 259,000 square foot state-of-the-art Class A warehouse building on our 17-acre site in the Permian Industrial section of Harford County, Maryland. This spec building is expected to deliver to deliver at the end of this year. In Northeast Maryland, along the I-95 corridor, we were in the middle of predevelopment activities on our 178 acres of industrial land that will ultimately support a 900,000 square foot distribution center or smaller multiple buildings depending on the market at the time. Depending on favorable market conditions, we will be in a position to break down on this project as early as Q1 of 2025. Finally, we are studying multiple conceptual designs for our 55 acres in Harford County, Maryland, adjacent to our existing Cranberry Run Business Park.

Various configurations should yield from 600,000 to 700,000 square feet dependent on final design parameters and market demands. And existing land leases for the storage of trailers on-site helped to offsite our carrying and entitlement costs on this property until we’re ready to build, which could be as early as 2025. Completion of these three industrial development projects will add over 1.8 million square feet of additional warehouse projects to our industrial platform that when completed upon completion will result in our industrial commercial business segment consisting of over 2.35 million square feet. Subsequent to year-end, we finalized our first ever industrial joint venture with BBX Capital for the development of 215,000 square feet warehouse on I-4 highway between Tampa and Orlando, Florida, assuming favorable market conditions, we hope to begin construction here in Q4 this year.

Also included in this strategy is a joint venture project, which is a 50-50 partnership with St. John’s Properties called Windlass Run, which is part of a mixed-use development in Whitemarsh, Maryland, that includes 3,300 residential units and over 3.5 million square feet of commercial space. Our project currently includes 100,000 square feet of single-story office and retail and four buildings. At year-end, Windlass was 87% leased and 78.3% occupied in the office product and 38.2% leased and 22.9% occupied on the retail side. Our second development strategy is multifamily, where apartment projects are developed in conjunction with third parties. For FRP is typically the majority owner, and we share acquisition, development and asset management tasks with outside local market leaders to facilitate day-to-day operations.

These properties are housed in the development section until they are completed and have maintained a 90% occupancy level for a period of 90 days before being moved to the multifamily business segment. Currently, this strategy houses Bryant Street and Verge in Washington, D.C. and 408 Jackson in Greenville, South Carolina. Bryant Street consisting of 487 apartments and 91,000 square feet of retail in three different buildings was 93.8% occupied. And this retail components were 96.6% leased and 82.7% occupied at quarter end. Overall, Department of Prime Street averaged the renewal success rate of 65% and rental rate increases of 3.8% as of quarter end. This project will be transferred out of this strategy in development to the multifamily business segment at the end of this quarter.

Our newest project in the district, Verge received its final certificate of occupancy in the first quarter of 2023 and is 90-point — excuse me, 90.7% leased and 85.8% occupied with 45% of its 8,400 square feet of retail spoken for at the end of the year. Lease up of this property has gone well. an average occupancy for the quarter at Verge was 78.9 7%. 408 Jackson, our second mixed-use project in Greenville, is located downtown and shares the Street Plaza with Floorfield, follow with the Greenville drive and affiliate of the Boston Red Sox. 408 Jackson was placed in service during the fourth quarter of ’22 and is as of quarter end was 95.2% leased and 93.4% occupied. Bryant — like Bryant Street, this project will be transferred to the multifamily business segment at the end of this quarter.

Average occupancy for the quarter was 9.37%. It’s 4,300 square feet of retail is fully leased and is targeting an opening date sometime this summer. We’re in the home stretch of lease-up for all three of these aforementioned joint venture properties. When they reach stabilization and are transferred to multifamily, that business segment will have 1,827 apartments and 126,000 square feet of retail. Unlike a warehouse in the Development segment, our multifamily assets are already in operation. So if you refer to the Development segment NOI on Page 13 of our press release, you will note that these assets generated over $5.46 billion in NOI in 2023 versus million last year, inclusive of an aggregate loss in NOI of $611,000 at 408 and Berg. Still another strategy within development is our principal capital source program.

It’s a program where, among other lending strategies, we provide working capital towards the entitlement and horizontal development of residential land, which is presold prior to the commencement of any infrastructure improvements. and ultimately transferred to national homebuilders. This strategy includes a charged 10% interest rate and a minimum preferred return of 20%, above which a profit-induced waterfall determines the final split of proceeds. The first of our two current projects is Amber Ridge and Prince George’s County, Maryland. With a peak capital out of $12.8 million, all 187 lots have been transferred out to the homebuilders and a final development activity should wrap up sometime during the second quarter of this year. Completion of this project, interest income and profits are expected to total $4 million.

Our other current lender lending venture is called Presbyterian Homes now Aberdeen overlook, a 344 lot 110-acre residential development project in Aberdeen, Maryland. We’ve committed $31.1 million in funding under similar terms on to Amber Ridge. $20 million was drawn at the end of the year. The national homebuilder is under contract to purchase all of the finished building lots. Horizontal construction has begun. The first 11 finished lots have been taken down and $4.5 million in interest and principal has been returned to the company by year-end. In closing, we remain pleased with the company’s performance and are optimistic about growth opportunities. Challenges we have foreseen for a while came to roost in the final quarter of ’23, as we saw record-setting residential rents begin to flatten with increased competition.

The surplus of new apartments coming online in Washington, D.C. over the next several quarters will directly compete with our Waterfront assets. Fortunately, three assets are stabilized and we expect the third to stabilize prior additional significant competitive apartment deliveries in the latter part of ’24 and early ’25. We’ve been well served by the confidence we have placed in our design, amenities and management teams, coupled with our careful and patient approach to development. Weathering markets and competition is not new to us. We stand on firm foundations and a step test belief the challenges to get opportunities. With a strong dedicated and talented team in place, FRP will continue to grow its portfolio and in turn, its revenue and profits through a steady, careful and well recent approach to the market.

We look forward to building upon our successes and further cementing our place in the market. Thank you, and I’ll now turn the call back to John.

John Baker: Thank you, David. As many of you saw in our subsequent event note in yesterday’s earnings release, we announced a forward split of our common stock at a ratio of two post-split shares for every one presplit share. As a thinly traded company with a small number of shareholders, we believe this has the potential to add some liquidity to our stock. At this point, we’re happy to open it up to any questions that you might have.

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Q&A Session

Operator: [Operator Instructions] We will take our first question from Curtis Jensen with Robotti & Company.

Curtis Jense: Hey, good morning. Can you hear me okay? Sure. Hey, John. I’m thinking about Bryant Street, and I don’t — are we still in a — we don’t have permanent financing on that.

David deVilliers: Correct. Yes.

Curtis Jense: What’s kind of the status there? And where do you see that? Is it just a function of waiting until rates get a little more attractive? Or…

John Baker: David can speak to this. Go ahead, David.

David deVilliers: Yes, I’ll take a swing out of, Curtis. Yes, part of it is getting the retail in and occupying and there is some free rent that you always go through in that side of the business. So that’s where we’re really waiting which should some — hopefully will be sometime during this year. But obviously, we’re operating under a floating interest rate, and we’re looking to hopefully see that the interest rates start to drop a bit, and then we’ll look to permanently finance that program. We obviously were in a position to do that when the construction loan came due, which is why we did the interim financing, which is also — again, we are on a floating rate. But that’s the main reason. It’s just getting the commercial side operating and a little bit of stabilization, then it will be a better time to go at the market also with hopefully, interest rates starting to go down a bit towards the end of the year.

Curtis Jense: When you say retail, is that mostly referring to the food court, like the little…

David deVilliers: It’s that in part of it, Curtis, we have another, say, call that we’ve got two leases that are executed for about 8,000 square feet of the inline retail. They’re under construction now. it took forever to get the building permits out of the district government agencies. So that’s an issue. We have — and we have another one, LOIs out for another one. So we’re just trying to get all of that wrapped up. And again, we don’t see a hurry right now because of the interest rates.

Curtis Jense: And how do you — how would you describe the verge as — I mean is it kind of meeting your expectations?

David deVilliers: For the most part, yes, there are significant units coming online towards the end of this year. And they have a positive, they will ultimately have a positive effect on that area. We’re no longer kind of out in the middle of nowhere because we will be a little bit more of the center of the doughnut as opposed to the outskirts because — there’s about 1,400 units coming on that are further west, if you will, of the bridge than where we’re located. So they all started right after COVID. And so there was a dearth of new projects that were — that went under construction right after COVID. And of course, there was — there’s pretty low interest rates at that time, too. So they’re up and going. The good thing is critical mass will, in some cases. But the interesting dynamic is there is nothing in the pipeline coming out after those two at the end of ’24 and early ’25. We think we’re in a pretty good place.

John Baker: Just a follow up on what David is saying, permanent financing is obviously the ultimate goal, but that’s only after we are able to grow the NOI to where we had envisioned it. I don’t think we’d go out and seek permanent financing at the NOI that we’re at right now, our goal is to grow net operating income, increase the value of the property so that by the time we get to the end of the opportunity zone 10-year hold period we’ve got a healthy asset with an appropriate amount of debt on it. And I mean, when I say appropriate, I mean the right amount, not too little, not too much. And the fact that we expect to get a good interest rate on it in a few years. We’ve just — it speaks to — that’s a benefit and — anyway, I think between Bryant Street, Verge, Dock 79, Maren, the D.C. market isn’t where we want it to be, but we’ve got really, really good assets.

We’ve got good people running them. There’s a lot of supply that’s come on, but it’s not Riverfront. It’s not — certainly not the quality of our assets. And we think in the long term, that’s going to continue to be better for us.

Curtis Jense: Your lending ventures, is the national homebuilder a publicly listed company — have you named to the…

David deVilliers: It’s NBR, it’s NBR. They were actually — they had — they had a soft opening for the Aberdeen overlook property about 4, 5 weeks ago. And as I said in the opening remarks, we transferred 11 lots out to them at the end of the year. we certainly have a pretty substantial deposit from them as well. And in their soft opening, they had over 400 people sign up. for some of their different products. Now signing up and buying is a pretty good distance between the lip and the comp, but it’s a pretty favorable pretty favorable visual, and it’s a beautiful area in one that’s kind of once again is in the center of the doughnut, up in Aberdeen. A lot of construction is going on around them as it relates to retail. Large hospital has opened up and is stumbling its size. So we’re really excited about the potential for this Presbyterian homes, which has now been entitled with now that is opening up Aberdeen overlook.

Curtis Jense: All right. I’ll jump off. Thanks and keep up the good work.

Operator: We will take our next question from Stephen Farrell with Oppenheimer.

Stephen Farrell: Good morning. Just a quick follow-up on the D.C. market. Are you currently offering concessions at the Maren and Dock 79 small ones, if any?

David deVilliers: Again, we see our rent growth in Dock and Maren for the year. we had 2.8% renewal rent growth in Dock 79 and 4.21% rental growth in Maren. Trade-offs in Maren were 1.9%. They weren’t is good in Dock 79 because at the beginning of the year, Stephen, the first two or three months of 2023, we had we replace the manager on site. We have lost a little bit of the occupancy. And so we wanted to get the heads back in the beds and that kind of eroded some of our potential profitability, which is why we did have a little bit — we had some concessions there. Everything is pretty much stabilized now, and so we’re in pretty good shape.