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Edited Transcript of FRPH earnings conference call or presentation 2-May-17 6:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 FRP Holdings Inc Earnings Call

JACKSONVILLE May 4, 2017 (Thomson StreetEvents) -- Edited Transcript of FRP Holdings Inc earnings conference call or presentation Tuesday, May 2, 2017 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, President of Florida Rock Properties Inc and President of FRP Development Corp

* John D. Milton

FRP Holdings, Inc. - CFO, EVP, Treasurer and Secretary

* John Daniel Baker

FRP Holdings, Inc. - Executive Chairman and CEO

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Conference Call Participants

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* Bill Chen

* Curtis Robert Jensen

Robotti & Company Advisors, LLC - Portfolio Manager

* Richard Carlson

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Presentation

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Operator [1]

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

I would now like to turn the conference over to John Baker. Sir, you may begin.

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

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Good afternoon. I'm John Baker, Chairman and CEO of FRP Holdings, Inc., and with me today are David deVilliers, our President; John Milton, our CFO; and John Klopfenstein, our Chief Accounting Officer.

Before we begin, let me remind you that we may make forward-looking statements during the course of this call. Such statements reflect our current views with respect to financial results related to future events and are based on assumptions and expectations that may not be realized and are inherently subject to risks and uncertainties. Future events and actual results may differ from the results discussed in such forward-looking statements. Please refer to our 10-Q and other documents filed with the SEC by the company for further information.

Our net income for our first quarter of 2017 was $1,443,000 or $0.14 per share versus $1,820,000 or $0.18 a share in the same period last year. The decline was primarily driven by a $771,000 increase in loss from joint ventures as we booked expenses and depreciation during the lease up of our Washington, D.C. apartment project Dock 79.

Now let me turn it over to our President, David deVilliers, to discuss our operations during the quarter.

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David H. deVilliers, FRP Holdings, Inc. - President, President of Florida Rock Properties Inc and President of FRP Development Corp [3]

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Thank you, John, and good day to those on the call this afternoon. I will now take you through our results for the quarter just ended March 31. As John articulated in his opening remarks, we enjoyed another successful quarter in both of our income-producing segments and our development segment was busy further preparing certain nonincome-producing assets for income production.

Relative to the Asset Management segment, total revenues from our building platform for the quarter just ended decreased 3.8% to $7,285,000, as a result of lower operating expenses and related reimbursements.

Net operating income increased $247,000 or 4.5% over the same period last year to $5,689,000, due primarily to the acquisition of the Gilroy Road warehouse building in Hunt Valley, Maryland in July of 2016. We ended this quarter with total occupied square feet of 3,525,234 square feet, an increase of 177,122 square feet or 5.3% over the last year same quarter. Our occupancy level was 90.8%, up 90 basis points from the previous quarter and leased square footage was 93.9% at the end of the quarter versus 92.5% on December 31.

As to same store, average annual occupancy for the quarter increased 61,048 square feet or 1.7% to 92.3% and the corresponding net operating income for the same period increased 1% to $5,508,000 from $5,454,693.

Relative to the Mining and Royalty segment, revenues were adjusted down slightly for the quarter just ended over the same period last year by 0.9% or $16,000 to $1,762,000. This is largely due to a $112,000 decrease in royalties at our Lake Sand location, the consequence of Vulcan having fully depleted our proven reserves there.

Further capital expenditures would be required by our tenant to change their mining plan and realize more than 3 million tons of probable reserves at Lake Sand, which we do not anticipate any time soon.

Total operating profit in this segment was $1,559,000, a decrease of $15,000 versus $1,574,000 in the same period last year. We believe the volumes will continue with the higher levels from our locations for the foreseeable future as construction activity in Florida and Georgia continues to improve.

And finally to our Land Development and Construction segment. As I previously stated, this segment is responsible for seeking opportunistic purchases of income-producing properties and managing and developing our nonincome-producing assets into income production. Thus, this segment generates minimal revenues, but incurs significant costs to accomplish these objectives. This business segment is the main driver behind our growth. To this end, we spent a net $3.7 million and an extensive amount of time during the quarter on capital projects including: one, the ongoing construction of 103,653 square-foot building at Patriot Business Center in Manassas, Virginia, which as of April 1 was placed in service and is 83% leased; two, the reconstruction of the bulkhead along the Anacostia River at our 664E property in anticipation of a few future high-rise developments similar to our Riverfront project, which of note is less than 0.5 mile down the river; three, working with our joint venture partner with ongoing leasing and marketing strategies for Dock 79, or Phase 1 at Riverfront; four, predevelopment activities for the next phase of Riverfront or Phase 2; and five, the conceptual planning for a planned unit development application to the appropriate authorities for our Hampstead property, which we had previously rezoned from industrial to residential, in order to maximize the assets, profitability and expedite its disposition.

So Phase 1, or Dock 79, began preleasing activity in late May of 2016. And as of April 23, the residential units are 71% occupied and 80% leased, and 4 of the 5 retail suites are 80% leased with occupancy scheduled for the summer of 2017. This project is currently above pro forma in effective rents and leasing absorption, with residential stabilization expected sometime in the third quarter of 2017.

Last fiscal year, we finalized our joint venture agreement for the development of our remaining acreage at Windlass Run Business Park. During the most recent period, the venture has been going through the final stages of completing the entitlement process for a multibuilding business park, consisting of approximately 329,000 square feet of single-story office space. Land development and ultimately, the commencement of the first phase of vertical construction is anticipated to begin in the summer or early fall of 2017.

In conclusion, we will have some backfilling to do at some of our warehouse locations as a result of an inordinate amount of tenants that have and will be vacating during the balance of the year, but we're hopeful we will prevail. The velocity of our marketplace has been strong and barring something unforeseen, we believe it will remain for the foreseeable future.

Thank you, and I'll now return the call back to John.

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

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Thanks, David. As we have discussed previously, we are preparing the company for a possible conversion to a Real Estate Investment Trust. We converted our September 30 fiscal year to a calendar year to comply with REIT accounting rules and we have contributed our mining reserves to a wholly-owned subsidiary. Because the parent company still retains control of the underlying land itself, the portion of the mining royalties not attributable to the reserves will closely resemble ground rents, which are REIT-able income as opposed to the payment for minerals, which is not. There are a number of issues we must resolve before we make the decision to convert, but the most important one will be the tax rate the company will pay if we don't convert. If President Trump's proposed 15% rate is approved by Congress, my recommendation to our board would be not to become a REIT at this time as the tax savings would no longer outweigh the loss of financial flexibility we would give up as a REIT. Obviously, however, there will be a lot of twists and turns before that is resolved, more to come, and thanks for your patience.

Finally, I want to thank Tom Baker for serving as our CEO since 2010 and wish him well with his new responsibilities at Vulcan Materials. I look forward to working with you again as your CEO.

We appreciate your interest in our company and look forward to talking to you next quarter. We'd be interested in answering any questions you might have at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Richard Earlson (sic) [Richard Carlson], RCS Asset Management.

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Richard Carlson, [2]

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Could you tell us what the approximate percentage number of 3-bedroom apartments at Dock 79 is and 1-bedroom apartments?

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

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You're talking about the number of 3 bedrooms versus one bedrooms?

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Richard Carlson, [4]

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Yes.

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

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I don't think we have any 3-bedroom apartment.

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Richard Carlson, [6]

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Okay. I looked on your website. I thought I saw some for rent. Okay. So there are mostly 2 bedrooms?

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

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They are mostly studio and 1-bedroom apartments, with a few 2 bedrooms, but there is -- the greater majority of them are studios or 1-bedroom.

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Richard Carlson, [8]

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Maybe I could ask another one, could you tell us your average rent so far?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [9]

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I don't think we've made that public. Is it on the website?

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Richard Carlson, [10]

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No, it's not. I could figure it out.

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [11]

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Hope we've said it's above our pro forma rents, but we'll probably make that public at the time we've reached stabilization.

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Richard Carlson, [12]

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Okay. And you still own 77% of that, is that correct?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [13]

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At this time, yes, sir.

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Richard Carlson, [14]

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And the Hampstead property, what kind of zoning did you get through the PUD?

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David H. deVilliers, FRP Holdings, Inc. - President, President of Florida Rock Properties Inc and President of FRP Development Corp [15]

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We -- the zoning change was from industrial to residential. And we are seeking a PUD processing development at the present time.

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Richard Carlson, [16]

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Okay. So it's zoned for residential, that's quite an accomplishment. Congratulations. The 664 East -- I don't want to monopulate this, if you have other questions, I'll get off. 664 property, so Vulcan has an option for 5 more years after the termination of their lease, have you got any indication whether they'll extend?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [17]

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I don't think there is any question, but they would extend.

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Richard Carlson, [18]

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They would extend. So you really can't do anything with the property til 2026 or so, is that correct?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [19]

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That's probably correct.

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Richard Carlson, [20]

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Okay. And Phase 2 of the Riverfront project. So that's been approved, I take it. And you'll start building in 2 years, was it? I'm a little fuzzy on that one.

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

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No, sir. We're waiting on the order from the zoning commission to become final. And we expect that in the next 30 to 45 days. After that becomes final, we could begin construction as soon as late this fall or early next spring.

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Richard Carlson, [22]

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Okay. And is that building going to be approximately the same size as the Dock 79?

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

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It doesn't have quite as many units. I think it's scheduled for about 255 units.

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Richard Carlson, [24]

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And then you have 2 more in your plan, is that correct, that are sort of on paper.

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [25]

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3 and 4, but we haven't finalized exactly what they will be.

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Richard Carlson, [26]

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Okay. And this is my last question. Of the subsidiary that -- in which you put Vulcan, how will you account for that if you become a REIT? So you'll have operating income and I guess, under REIT standards, you can have some. Can you tell us what that rents could be? And if you can, could you tell us how you'll account for it?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [27]

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Well, sir, at this point in time, if we make a reelection, those -- the amount that is paid for the reserves and attributable to that will go into income as a taxable REIT subsidiary, so it will be taxed as a C corp as a subsidiary of the REIT. And as such, it will be limited to fewer than 20% of the gross assets of the combination and less than 15% of the gross income.

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Richard Carlson, [28]

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So that's quite -- that's a larger number than I thought. So...

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [29]

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We didn't tell you -- we didn't say it was going to be that large, those are just the limits.

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Operator [30]

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(technical difficulty)

Okay. We'll go onto our next question from Curtis Jensen, Robotti & Company.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [31]

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Just a quick question on -- a couple of few questions, I guess. Stage 2 Anacostia, in terms of a construction loan, is that on to-do list at this point or, I mean, is there any sense of timing and what the size of such a loan might be?

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John D. Milton, FRP Holdings, Inc. - CFO, EVP, Treasurer and Secretary [32]

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It will be some percentage of your construction costs. We don't have that finalized yet, and we don't have the final terms of construction financing nor do we have a final contract of construction.

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [33]

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Curtis, those are -- that's the to-do list for the summer.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [34]

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Okay. And then going back to Phase 1, what's the plan on the construction loan for Phase 1? Is that just going to be refinanced somehow? And what kind of options do you have there?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [35]

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We're exploring those as well and we'll have a year or so to work that out.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [36]

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All right. And then going, let's see down river, I guess, 664 Buzzard Point, what -- if Vulcan is going to be mining there for the next 5 to 10 years, what's -- what was needed to -- I mean, why did you have to lay out capital to reinforce the bulkhead or redo the bulkhead?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [37]

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It's a good question, but we did it to keep the land from washing away. It was in awful shape, and we literally had to do it to preserve the land and make it usable for them as well. We get a nice rent from them. They're actually in the concrete business on that property. And so they've got trucks running over it and it was a safety issue as much as anything else, but it's money you wish you didn't have to put out but we did.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [38]

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Is there a possibility that you could negotiate with them in 5 years and, say, give them some upside as to if you could accelerate development there given what else is going on, I think the Coast Guard building is getting redeveloped and obviously D.C. United and...

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [39]

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Absolutely. I mean, obviously, there is a possibility of doing anything. That will be a very special ready mix plant site location. And so it will be an interesting negotiation if we can get it done.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [40]

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If you want a more valuable ready mix plant in the country?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [41]

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Right, right.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [42]

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And then just Washington, D.C., generally, what's your best sense of -- I guess, it seems like there is a fair amount of new supply and what's your sense of, kind of, like, job growth and new supply and absorption trends, lot of competitive products around relative to the kinds of things you're developing?

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David H. deVilliers, FRP Holdings, Inc. - President, President of Florida Rock Properties Inc and President of FRP Development Corp [43]

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There has -- this is David deVilliers. We've been actively involved in watching D.C. grow from a populous standpoint. What's been happening down in the southeast, which is the quadrant that we're operating in, has been quite significant over the last several years and the word on the street is, there's still a pretty good run rate left to develop and also to -- from a supply and a demand level. So we're being cautiously optimistic about the future, but we think that we've got a pretty good plan and certainly a pretty good location.

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [44]

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The -- we've gotten at this point in 8 months, so we're at 80% lease in 8 months, which is certainly ahead of our projection. We sit down with our partner and go through the marketing studies before we'll actually kick it off, but my gut feel to you is that when we see those numbers, we're going to find them to be even better than what we saw when we kicked off the Phase 1. And the one thing we know for sure is that being on the river has a real attraction as opposed to being even a block or two back. And so we feel like we've got really a niche opportunity here and it's something that will always be in high demand.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [45]

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And then just last thing is, any more color on -- I think somebody had talked about the kind of relatively high level of lease expires in your flex industrial and any more color on that? And how might your sense as to how things might go this year?

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David H. deVilliers, FRP Holdings, Inc. - President, President of Florida Rock Properties Inc and President of FRP Development Corp [46]

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Not really, we have -- It's an ebb and flow business and we've been pretty fortunate over the years to maintain a pretty strong occupancy level. We're in sub-markets that are pretty strong in and around the Baltimore-Washington marketplace. And it's just part of the ebb and flow of our business.

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [47]

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But we've got a slug of businesses coming open. It takes us 15 to 20 months on average to when we don't re-let it immediately to get it filled up. And I would anticipate that, that's what would be the scenario here.

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Operator [48]

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(Operator Instructions) Our next question will come from Richard Carlson, RCS Asset Management.

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Richard Carlson, [49]

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I just had a couple of follow-up questions. Could you give us a little color on the Fort Myers, Vulcan facility?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [50]

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Yes. We've got 1,900 acres of land down in Fort Myers. It's been under lease for a long, long time to Vulcan and to its predecessor Florida Rock. And we just found out literally this week that all the permits have been received for that property. In the first phase of that property, there is 105 1-acre residential lots that will be lakefront lots. And it will become available when that first phase mining is done. Obviously, that's up to Vulcan, and they will mine it as fast as they -- as is logical for them, but it is particularly good rock and we expect them to get on it. And while we don't see in this year any dramatic change in royalties, we expect the royalties from that operation will pick up pretty substantially beginning next year and then in 5 or 6 years, we'll be in a position where we can start developing those lots, which should have tremendous value.

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Richard Carlson, [51]

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Is that held in your -- in the mining subsidiary?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [52]

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Yes, it is.

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Richard Carlson, [53]

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Could you give me a little bit more color on your comment on, if the tax rate goes to 15%? I missed whether it was long term and the corporate rate and why that would have such a bearing?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [54]

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Well, think about it this way. If you convert to a REIT, of course, what you're trying to do is make your income tax free to your shareholders. And you can distribute out. And what we were probably -- I think it's 90% is the requirement that you got to distribute out 90% of your pretax income to your shareholders as a REIT. If the tax rates went to 15% from 39%, you've really taken a lot of the motivation of avoiding taxes out of the picture because the give-and-take is, you give up a lot of financial flexibility when you become a REIT. You have to dividend out 90%. You got to dividend out initially all your earnings and profits going back since the beginning of the company, which hurts your liquidity a little bit. So it's one of those things where you get all the facts together, you make your judgments, and you say, this makes the most sense now that we know all these things. And I just wanted to bring it up, and I appreciate you asking it again, so we could shine the light on it. What -- we're shareholders in this company just like you are, and what we want is, for it to be the most tax efficient way to benefit our shareholders, while still leaving us with the ability to grow and create value. So it will be a balance. It will be a decision we'll make probably at the end of this year, but if we don't make it at the end of this year, we'll make it next year. And so what I would tell you is, we teed it up to where we can make that decision and go forward as a REIT because nothing that would require us to do it if the corporate tax rates go down to a very low level.

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Richard Carlson, [55]

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So if the corporate tax rate went to 20%, you'll reevaluate it and 15% is an outlier, I take it?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [56]

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That's the number demand throughout. And I think I would agree with you.

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Richard Carlson, [57]

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Okay. And my last question, can you tell me, so I don't have to go figure it, how many 2 bedrooms and 1 bedrooms there are at Dock 79?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [58]

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We'll get you that right now.

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Richard Carlson, [59]

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Okay. I can see the rents on your website and right, of course, there are no 3 bedrooms.

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David H. deVilliers, FRP Holdings, Inc. - President, President of Florida Rock Properties Inc and President of FRP Development Corp [60]

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There are 65 2 bedrooms, 14 junior 2 bedrooms, and then the rest are 1 bedroom and studios.

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Richard Carlson, [61]

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Can you tell me how many studios or how many 1 bedrooms?

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David H. deVilliers, FRP Holdings, Inc. - President, President of Florida Rock Properties Inc and President of FRP Development Corp [62]

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The studios are 45.

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Richard Carlson, [63]

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45, okay. I can figure out the rest.

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David H. deVilliers, FRP Holdings, Inc. - President, President of Florida Rock Properties Inc and President of FRP Development Corp [64]

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And then the rest are 1 bedrooms. There's 8 that are 1 bedroom, plus 10 and then the rest are 1 bedroom.

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Richard Carlson, [65]

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So you've been getting close to $4,000 for 2 bedrooms per month, that's incredible, wow. All right, that's all the questions I have. You guys are doing a great job by the way.

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Operator [66]

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Our next question will come from Bill Chen, Rhizome Partners.

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Bill Chen, [67]

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A lot of my questions have been answered. I was just wondering the -- if we do elect to converting to REIT, do we have an estimated amount of how much needed to pay out? Do you have a view whether you will pay that out in stocks versus -- I think the rule is, it has to be at least 25% cash and at most 75% stock. Do you have any -- so really kind of 2 questions. One, what would that purging distribution be? And then do you have any thoughts on what that cash/stock mix would be?

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John D. Milton, FRP Holdings, Inc. - CFO, EVP, Treasurer and Secretary [68]

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Bill, John Milton. We don't have an absolute answer for either one of those yet. On the first issue, we're looking back and very carefully at how we allocate the earnings and profits in connection with the spinoff we accomplished. And there may be an alternative to allocate those in a different manner that would lower the dividend requirement. We don't have an answer on that yet and we're investigating that. And the second answer is, we're still up in the air as to how much we would pay in cash or stock and we'll let you known when and if we make the decision.

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Bill Chen, [69]

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Got you. If I may ask a follow-up question, there is a -- I think some time ago, we have -- there's been the possibility that the aggregate royalties may be potentially restructure into some sort of volumetric payment, which will qualify it to be REIT-able, is that still an option on the table or is that no longer an option?

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John D. Milton, FRP Holdings, Inc. - CFO, EVP, Treasurer and Secretary [70]

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That's really not an option at this stage. What we have done is, we basically used a taxable REIT subsidiary structure to take a substantial portion of the royalty income that will not qualify as REIT-able income and then we'll keep that value underneath the threshold required to remain a REIT.

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Operator [71]

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(Operator Instructions) Speakers, at this time, we have no further questions in the queue.

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman and CEO [72]

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Well, thank you, all for your interest in our company. As you can tell, we're excited about where we stand. We're excited about the D.C. market and what that means. And we look forward to talking to you next quarter.

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Operator [73]

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Thank you very much. Ladies and gentlemen, at this time, this conference is now concluded. You may disconnect your phone lines, and have a great rest of the week. Thank you.