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Edited Transcript of FRPH earnings conference call or presentation 2-Aug-18 6:00pm GMT

Q2 2018 FRP Holdings Inc Earnings Call

JACKSONVILLE Sep 4, 2018 (Thomson StreetEvents) -- Edited Transcript of FRP Holdings Inc earnings conference call or presentation Thursday, August 2, 2018 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David H. deVilliers

FRP Holdings, Inc. - President

* John Daniel Baker

FRP Holdings, Inc. - Executive Chairman & CEO

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Conference Call Participants

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* Curtis Robert Jensen

Robotti & Company Advisors, LLC - Portfolio Manager

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Presentation

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Operator [1]

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Excuse me, everyone, we now have John Baker in conference, Executive Chairman and CEO of FRP Holdings, Inc. (Operator Instructions)

I would now like to turn today's call over to Mr. John Baker. Sir, you may begin.

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman & CEO [2]

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Thank you. Welcome, and as she said, my name is John Baker, and I'm Chairman of FRP Holdings. On the line with me today are David deVilliers, our President; John Milton, our CFO; and John Klopfenstein, our CAO.

Before we begin, let me remind you that any statements on this conference call which relate to the future are, by their nature, subject to risk and uncertainties that could cause actual results and events to differ materially from those indicated in such forward-looking statements. These include risks, listed from time to time in our SEC filings, including, but not limited to, our annual and quarterly reports.

As you all have seen, we generated a gain of $165,333,000 before taxes from the sale of our warehouses. We have accrued $44,668,000 in taxes, which we will try to reduce through 1031 and other deferments. This leaves us with a net income of $120,465,000 from the sale and $311,000 of cash before tax payments, which we will begin to deploy.

As we said in our press release, the good news is that we believe we sold at peak values, but we certainly don't want to buy and redeploy our money at peak values. The way we're addressing this is to buy and develop property. This is how we have built our company

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Baltimore management team through real core competence. Let me pause and turn the conversation over to David deVilliers. I've asked him to focus on the strategy for your company going forward. David?

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David H. deVilliers, FRP Holdings, Inc. - President [3]

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Thank you, John, and good day to those on this call this afternoon. As one can see from John's opening remarks, we had a busy and, I must say, quite a productive quarter in all of our business segments. Relative to our Asset Management segment, I would say something similar to my comments for the previous quarter, which would be that in light of John's comment with regard to the successful culmination of the sale of our warehouse platform, which made up all of this business segment with the exception of 3 office buildings, I'll pass on any further mention of the metrics for this quarter as they are somewhat inconsequential. I am, however, happy to provide them during the Q&A, if asked.

As to our other business segments, the Mining and Royalty segment enjoyed 12.1% increase in its revenues for the quarter just ended over the same period last year, increasing $222,000 to $2,055,000. Total operating profit in this segment was $1,866,000, an increase of 11.5% also over the same period last year. These positive quarter-over-quarter results were mainly due to multiple increases in tonnages sold at locations throughout our program. The most worthy being Manassas and Tyrone, combined with the negative adjustment to royalties and tons for the same quarter ended June of 2017, as a result of an overstatement earlier in the year by one of our tenants. We remain positive for this segment. Demand for homes still exceeds supply and unemployment remains historically low. This demand for construction combined with full employment translates into labor shortages and a backlog of projects that we believe will keep demand, for aggregate, steady.

With respect to the Land Development and Construction, this business segment is the main driver behind our growth. And as John mentioned in his opening remarks, this is where the rubber meets the road. As we've said before, this segment generates minimal revenues but incurs significant cost to accomplish these objectives. Several projects we have underway include a 94,350-square foot, 32-foot clear ceiling height warehouse in our Hollander Business Park in Baltimore, which will come online in the second quarter of 2019.

Our joint venture with St. John Properties should be at shell building completion by this fall for Phase 1, which includes 4 buildings, totaling 100,000 square feet of single-story office and small bay retail space.

With the building shells close to completion, marketing and leasing efforts are in full swing, with stabilization projected in the fourth quarter of 2020. Historic absorption in this market has been running the plus or minus 40,000 square feet on an average annual basis. Construction of Phase 2 of our Riverfront on the Anacostia project now christened The Maren for Star of the Sea will contain 264 apartments and 7,900 square feet of first floor retail and is expected to come online in 2020.

In addition, we're continuing the entitlement process on 2 residential developments, one in Baltimore County, Maryland with 129 residential building lots now dubbed Hyde Park, where we are a financial backer. And another on our 118-acre site in Carroll County, Maryland, where we are the owners, now called Hampstead Overlook, which will contain 250 residential building lots. These projects will absorb approximately $34 million over the next several quarters.

As further potential redeployment of the warehouse sales proceeds, we currently have $35 million placed with a qualified intermediary to acquire properties in the Baltimore, Washington area, where we would either develop new or upgrade existing warehouses with an eye to selling or joint venturing them upon lease stabilization. These purchases, if done, will qualify as 1031 exchanges and defer a portion of the accrued taxes from the warehouse sale.

By example, we're negotiating a contract of sale to purchase attractive land providing plus or minus 160 acres of developable property located in Anne Arundel County, Maryland that upon entitlement and future development will allow us to opportunistically construct, lease and ultimately, sell warehouse facilities, utilizing joint venture-type arrangements with third parties.

Additionally, we're negotiating with our joint venture partner to invest in the first phase of a multiphase mixed-use project located in Northeast Washington, D.C. That phase -- the first phase alone will consist of approximately 500 apartment units and 79,000 square feet of retail. The target property is located in an opportunity zone, which allows us to defer the capital gains on an estimated [$35 million] of the -- actually plus of the pretax profits from the warehouse sale. If successful, this project will commence in late 2018 or early 2019.

Both of these aforementioned projects are in due diligence and if closed, would cost as much as $50 million plus in land acquisition and entitlement costs prior to any horizontal or vertical development. While the 1031 and opportunity zone purchases would save us between $10 million and $15 million of taxes from the warehouse sale, we're driven to these projects by the baseline economics of their potential development. I mentioned these, not to imply they're done deals but to indicate that we're busy looking to put the sales proceeds to work through the identification and ultimate development of projects like the ones referenced herein with the intent to meet or exceed the long-term returns and value creation realized from our previously owned warehouse portfolio.

Moving on to our Riverfront on the Anacostia business segment, occupancies as of June 30 were up from the previous quarter ended March 31 to 96.4% from 91.8%. Average occupancy for the quarter was 95.3%, up from 92.8% from the previous quarter.

More importantly, as the first generation of leases have expired, we continue to exceed our budgeted success rates and rental rate increase. This past quarter, the retention rate was 58% and at an average rental increase of 4.52%. The retail component of Dock 79, which totals 14,176 square feet was 46% occupied and 76% leased as of the end of the quarter. The third of 4 retail suites is currently under construction and will not be ready to serve the public until after the baseball season in October.

Both current restaurants have been well received and experienced high levels of traffic and volume of sales. In conclusion, to echo John's comments earlier, this past quarter was one of our most important ever for obvious reasons. Our portfolio of industrial buildings took decades to put together, and the majority of the assets came from land we purchased, developed and ultimately sold. As the next chapter of your company unfolds, we will be operating with a greatly streamlined group in Baltimore going from 18 to 9 dedicated employees resulting in annual savings of over $1.5 million. As we initiate a more opportunistic approach to extracting the highest value from the assets we develop. As to the question of what should we expect going forward? My answer to that would be, we will be traveling the same highway in the same vehicle, albeit, a little smaller, but we'll just be taking a different exit.

Thanks to all of you. And I'll now turn the call back to John.

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman & CEO [4]

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Thanks, David. We are excited about these projects that we've identified that, as David mentioned, each requires significant due diligence, which we will be exercising over the next few (inaudible). Our new organization is smaller, but it is (inaudible). We can do these projects and continue the company's growth. We are very focused on being good stewards of the cash proceeds, sale, and I hope we can find good projects to pursue. The recovery is long in the tooth, however, and if we can't find projects with real potential value, we will return the unused proceeds to our shareholders.

Now let me turn it over to you all for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is going to come from Curtis Jensen.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [2]

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Question going to Dock 79. I guess, MRP is still there. Their interest is still about 33%?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman & CEO [3]

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Yes.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [4]

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And do you get the sense that they're still happy holders?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman & CEO [5]

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Yes. Yes. They are very, very much long-term holders.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [6]

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Okay. And can you give us a sense of what kind of the supply and demand fundamentals in terms of multifamily around the Riverfront in -- and the yards? And maybe any little update there?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman & CEO [7]

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David, why don't you answer that?

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David H. deVilliers, FRP Holdings, Inc. - President [8]

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Certainly. John, Thank you. Extreme traffic, great velocity down there. The Southeast is -- still seems to be one of the greater places for the younger world to spend time. The yards, which as you may know, is right next door, is doing fairly well. Restaurants, the critical mass continues to grow, which actually helps and supports all of the development that we not only have, but what we look forward to going forward.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [9]

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Okay. And I guess, in the June quarter, is there a construction loan for, I guess, The Maren you're calling it now, what I'm still calling Potomac 71, but I guess, it's The Maren, is it -- there is a construction loan at this point?

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David H. deVilliers, FRP Holdings, Inc. - President [10]

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Yes, sir.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [11]

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And is that off balance sheet? Or is that on the company's balance sheet?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman & CEO [12]

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It's off balance sheet, but there have not been any draws at this time.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [13]

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Okay. And what's the total facility?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman & CEO [14]

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$71 million. David, is that right?

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David H. deVilliers, FRP Holdings, Inc. - President [15]

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Yes, sir.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [16]

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Okay. And will there be any other financing other than that construction loan to -- I'm trying to remember on Dock 79, you also used some supplemental financing to your bank -- to your construction loan?

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David H. deVilliers, FRP Holdings, Inc. - President [17]

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There was an EB-5 program on Phase 1. There is not one in Phase 2. There is a preferred equity program that's in place that we supply.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [18]

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Okay. Well, that's great. I guess, just the kind of the last thing is, I -- seems -- moving out of the Washington area, it seems like a lot of homebuilders are hungry for land these days. Do you have any comments on things in your portfolio that might be of interest to homebuilders looking for land or...

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David H. deVilliers, FRP Holdings, Inc. - President [19]

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Well, I can answer part of that, and that is relative up in the Baltimore area. As you could see, we have 2 land development projects that are for residential lots. We have a lot of interest from national homebuilders in both of those. But we still have to go through and complete the entitlement process before we can really get serious with them.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [20]

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Okay. And I was just sort of thinking maybe down in Florida or other places, whether you see any kind of increased appetite for blocks of land from homebuilders or anything that could be relevant to stuff that you all owned?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman & CEO [21]

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We really don't have anything that would be relevant. I don't think...

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [22]

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Not at this point. I mean -- okay. All right. Keep up the great work. And it's -- I think it's a fantastic time to be sitting around with a lot of liquidity. So good for you guys.

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman & CEO [23]

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Thanks a lot. Appreciate it.

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David H. deVilliers, FRP Holdings, Inc. - President [24]

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Thank you, Curtis.

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Operator [25]

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(Operator Instructions) There are no further questions in the queue. At this time, I would like to turn today's call back over to Mr. John Baker.

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman & CEO [26]

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Thank you all for joining us. We really appreciate your interest in the company, and we look forward to talking to you next quarter.

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Operator [27]

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Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.